Inventory how-to

How to calculate gross margin per product

Gross margin per product is revenue minus cost of goods sold, divided by revenue, shown as a percent.

Short answer: Gross margin per product is revenue minus cost of goods sold, divided by revenue, shown as a percent. You need your sell price and your true unit cost to get it right. SteadyShelf does not calculate margin, so you will do this in a spreadsheet using your own cost and price data.

The formula

Gross margin = (sell price - unit cost) / sell price x 100. Unit cost should include the product cost and inbound freight if you can allocate it. It does not need to include landed cost extras like duty or customs broker fees unless you track those separately per unit.

Getting unit cost right

Many stores only use the supplier unit price and skip freight, which overstates margin. If a shipment cost you extra to bring in, spread that cost across the units in the shipment and add it to each unit's base cost before you calculate margin. Keep this cost figure updated whenever your supplier changes pricing.

Per-variant vs per-product

Margin should be calculated per variant, not just per product, because variants often have different costs or prices. A shirt in size XL might cost more to make than size S even if both sell at the same price, which changes the margin on each one.

Using margin alongside reorder decisions

Margin tells you profitability per unit. It does not tell you how fast something sells or whether you are at risk of stocking out. Use margin to decide which products deserve more marketing push or shelf space, and use sales velocity and reorder points to decide when and how much to buy.

Step by step

  1. List the sell price for each variant.
  2. List the true unit cost for each variant, including allocated inbound freight.
  3. Subtract unit cost from sell price to get gross profit per unit.
  4. Divide gross profit per unit by sell price, multiply by 100 for the percent.
  5. Repeat per variant, not just per product, since costs can differ.
  6. Update costs whenever a supplier changes pricing or a new shipment comes in at a different cost.
  7. Review margin alongside sales volume to see which products are both profitable and popular.

Worked example

Say a candle variant sells for $24 and costs $9 from the supplier. A recent shipment of 200 units cost an extra $200 in freight, so you add $1 per unit, making true unit cost $10. Gross profit per unit is $24 - $10 = $14. Gross margin is $14 / $24 x 100 = 58.3 percent.

How SteadyShelf helps

SteadyShelf does not calculate gross margin or track your sell prices and costs for profitability purposes. It focuses on forecasting demand and reordering stock. Keep a simple spreadsheet or your accounting records for margin, and use SteadyShelf separately to decide when and how much to reorder.

$29/month flat, unlimited products and suppliers, 30-day free trial. Run the numbers now with the free reorder point calculator.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

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FAQ

Should I include shipping to the customer in unit cost for margin?

No. Outbound shipping to the customer is usually a separate expense, not part of cost of goods sold. Keep it out of the margin calculation unless you are building a full contribution margin that also subtracts fulfillment and payment fees.

How often should I recalculate margin?

Recalculate whenever your supplier cost changes or you adjust the sell price. For products with stable costs and prices, checking quarterly is usually enough.

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