Gross margin and net margin are often discussed as if one is a rough version of the other. They are not. One judges the product; the other judges the business. A store can improve either while destroying the other, and knowing which one moved is the difference between fixing a supplier price and fixing your overhead.
The two formulas
Gross profit = Realized revenue − COGS
Gross margin = Gross profit ÷ Realized revenue
Total expenses = Advertising + Other operating expenses
Net profit = Gross profit − Total expenses
Net margin = Net profit ÷ Realized revenue
Note the structure of total expenses. Advertising is an operating expense and is counted once. The most common arithmetic error in ecommerce reporting is subtracting ad spend to reach a "contribution" figure and then subtracting a total expenses line that also contains advertising — which understates net profit by exactly the ad spend, invisibly, because both steps look correct in isolation.
What each one answers
| Gross margin | Net margin | |
|---|---|---|
| Question | Does the product earn? | Does the business earn? |
| Subtracts | COGS only | COGS + advertising + all operating costs |
| Moved by | Supplier price, freight, pricing, discounts, product mix | Everything above, plus ad efficiency, fulfillment, headcount, software |
| Responds | Quickly, per product | Slowly, at business level |
| Use it to decide | What to stock, how to price | What you can afford to run |
A worked example
One store, one month, $60 average order value. Illustrative figures.
| Line | Amount | % of revenue |
|---|---|---|
| Orders placed | 1,000 | — |
| Orders delivered | 870 | — |
| Realized revenue | $52,200 | 100% |
| COGS | −$22,446 | 43.0% |
| Gross profit | $29,754 | 57.0% |
| Advertising | −$14,500 | 27.8% |
| Shipping & fulfillment | −$6,090 | 11.7% |
| Payment processing | −$1,540 | 2.9% |
| Software | −$620 | 1.2% |
| Salaries | −$5,200 | 10.0% |
| Total expenses | −$27,950 | 53.5% |
| Net profit | $1,804 | 3.5% |
A 57% gross margin and a 3.5% net margin, from the same revenue. The 53.5-point gap is the cost of running the business, and advertising alone is more than half of it.
This store is not in trouble because its products are bad — 57% gross margin is a healthy product. It is in trouble because 27.8 cents of every revenue dollar goes to advertising and the remaining structure leaves 3.5 cents. A supplier negotiation would help a little; an advertising efficiency improvement would help a great deal.
Where the two diverge
The interesting cases are the ones where the margins move in opposite directions.
Gross margin up, net margin down
Usually a shift toward higher-priced products that need more advertising to sell, or a price increase that reduced volume while fixed costs stayed put. The product got better and the business got worse.
Gross margin down, net margin up
Often a deliberate move into a higher-volume, lower-margin line that sells organically. Each unit earns less and the business keeps more, because the acquisition cost fell faster than the margin did.
Both flat, cash getting worse
Neither margin sees inventory. A store buying stock faster than it sells can hold both margins steady while running out of money — margins are a profit measure, not a cash measure.
Gross margin moves and nothing real happened
Reclassifying shipping from operating expenses into COGS drops gross margin several points and leaves net profit untouched. If your gross margin steps down and net margin does not, check whether a definition changed before you go looking for a cause.
What sits between them
There is a useful intermediate figure that neither margin captures: contribution after ads, which is gross profit minus the advertising allocated to it. It answers whether a product still earns after paying to sell it, without carrying the overhead that belongs to the whole business.
It is a product-level figure, not company profit — positive contribution across every product is necessary for net profit but not sufficient, because fixed costs still have to be covered. Contribution margin covers the full ladder.
Diagnosing a falling net margin
Net margin is a summary, which makes it a good alarm and a poor diagnosis. Work down in this order:
- Gross margin. If it fell, the cause is COGS, pricing, discounting or mix. Nothing downstream can fix a product that stopped earning.
- Advertising as a share of revenue. The largest variable expense in most ecommerce P&Ls and the one that moves fastest. See MER vs ROAS.
- Fulfillment per delivered order. A per-order cost that rises with weight, distance or carrier rates and is easy not to notice.
- Fixed costs against volume. Salaries and software do not scale down. A revenue dip raises their share of revenue without anyone spending more.
- Delivery rate. If more orders are failing to deliver, revenue falls while COGS and ad spend do not. This shows up as a net margin problem and is actually an operations problem.
Common mistakes
Counting advertising twice
Covered above, and worth repeating because the error is invisible. Total expenses includes advertising; subtract that total once.
Using placed-order revenue as the denominator
Both margins are ratios against revenue. If revenue includes orders that were cancelled or returned, both margins are overstated — and the overstatement is largest exactly where delivery rates are worst.
Comparing gross margin across stores with different conventions
Whether outbound shipping sits in COGS or operating expenses changes gross margin by several points with no change to the business. Gross margin comparisons between companies are close to meaningless without knowing both definitions.
Treating net margin as a product metric
Net margin is a business result. Allocating salaries and software down to individual SKUs produces a number that depends mostly on the allocation rule you chose.
Chasing a benchmark net margin
Net margin varies enormously by category, price point and how much demand is paid. The useful comparison is your business against itself over time, and whether the direction matches the decisions you made.
How ORVX reports this
ORVX computes gross profit as realized revenue minus COGS, and net profit as gross profit minus total expenses, where total expenses is advertising plus other operating expenses — with advertising counted exactly once. Both margins are ratios against realized revenue from delivered orders.
Because every screen derives from the same definitions, the gross margin on the profit dashboard and the one in a report are the same number, which is the only reason a discrepancy between two screens would mean something.
Frequently asked questions
What is the difference between gross margin and net margin?
Gross margin subtracts only the cost of the goods, so it measures whether the product earns. Net margin subtracts everything — advertising, fulfillment, fees, salaries, software — so it measures whether the business earns. A healthy gross margin with a thin net margin means the product is fine and the cost of operating around it is not.
Is advertising part of COGS?
No. Advertising is an operating expense. COGS is what the units you sold cost to obtain — manufacturing or purchase price, inbound freight, duties and per-unit packaging. Putting ad spend in COGS makes gross margin meaningless as a product measure.
What is a good net profit margin for ecommerce?
There is no credible universal figure — it depends on category, price point, delivery model and how much of your demand is paid for. The meaningful test is whether your own margin is moving in the direction your decisions intended, and whether it leaves enough to fund the next inventory order.
Why did my gross margin drop when nothing changed?
Check for a definition change before looking for a cause. Moving shipping between COGS and operating expenses, or applying a new supplier price retroactively to old sales, both move gross margin without anything real happening — and the second also rewrites your history.
Can net margin be negative while gross margin is high?
Routinely, and it is the most common failure pattern in ecommerce. A 60% gross margin business spending 45% of revenue on advertising and carrying 20% in fixed costs is losing money on every month, while every product looks profitable.