Understanding your profit margins is crucial for the success of your eCommerce business. Tracking sales numbers alone isn’t enough—profit margins reveal how much money you’re actually keeping after covering all expenses. Without accurate tracking, you could make poor business decisions that lead to shrinking profits or losses.
Many eCommerce sellers make common mistakes when calculating margins, which can result in overestimating profitability and cause issues like underpricing, overspending on advertising, or offering unsustainable discounts. Tracking every cost—from hidden fees to shipping and returns—is key to making informed, data-driven decisions.
By avoiding common profit margin mistakes, you can optimize your business for sustainable growth, better cash flow, and smarter decisions. In this blog, we’ll explore the top 10 mistakes sellers make when tracking profit margins and how to avoid them to ensure your business is profitable and scalable.
1. Ignoring Hidden Costs
A common mistake eCommerce sellers make is focusing only on the product’s selling price and cost, while overlooking the numerous hidden costs that can quietly erode profits. These hidden costs include platform fees, packaging materials, transaction fees, and even returns handling. While each of these might seem small on their own, together they can significantly reduce your profit margins, especially when they’re not tracked carefully.
How to Avoid:
To ensure you’re accurately capturing all costs, create a comprehensive breakdown of every expense tied to selling a product. This should include seemingly minor items like payment processing fees, packaging materials, shipping costs, and any platform-specific fees, such as Amazon FBA fees or eBay selling fees. For efficiency, tools like Seller Margins can help automate this process, making it easier to ensure no costs slip through the cracks and distort your true profitability. By keeping a detailed record of every expense, you can better price your products and make informed decisions to protect your margins.
2. Failing to Factor in Shipping Costs
Many eCommerce sellers treat shipping as a separate cost or pass it off directly to customers without integrating it into their profit margin calculations. However, neglecting to include shipping costs as part of the overall product cost can lead to an inflated sense of profitability. This is especially true for sellers who offer “free shipping”—a practice that, while attractive to customers, can significantly reduce profits if not carefully accounted for.
How to Avoid:
Always include shipping as a crucial component of your total product costs. Whether you’re absorbing the shipping fees through free shipping offers or charging customers, it’s essential to factor this into your pricing and profit calculations. Consider the different shipping options you offer—standard, expedited, or international—and how each one impacts your margins. By having a clear understanding of these costs and incorporating them into your profit tracking, you can set more accurate prices and avoid unexpected reductions in profitability.
3. Overlooking Return and Refund Costs
Returns and refunds are an inevitable part of eCommerce, but many sellers overlook how costly they can be. In addition to losing a sale, there are hidden expenses such as return shipping, restocking, and even handling damaged goods. Moreover, high return rates can indicate deeper issues like product misrepresentation or quality problems, which can chip away at your bottom line.
How to Avoid:
Track your return rate carefully and account for the full scope of associated costs when analysing profitability. This includes shipping costs, labour for restocking, and any losses from damaged or unsellable items. Evaluate why returns happen—product descriptions, quality issues, or unmet customer expectations—and address these problems to reduce returns and improve margins.
4. Not Tracking Advertising
Advertising is a double-edged sword. It can drive traffic and increase sales, but if not managed well, ad spend can quickly outpace profits. Failing to link advertising costs to specific product sales leaves you with an incomplete picture of profitability. This leads to the common mistake of thinking your ads are more successful than they actually are, especially if ad-generated traffic doesn’t translate into enough profit to justify the spend.
How to Avoid:
Use tracking tools to connect ad spend directly to the revenue generated from each product. This way, you can measure the true cost of customer acquisition. If a product isn’t producing enough profit relative to ad costs, it’s a sign to either optimise the campaign or reconsider promoting that product. You can also experiment with less costly advertising channels or narrow your targeting to improve cost efficiency.
5. Focusing on Revenue Instead of Profit
It’s tempting to chase high sales volumes, but large revenues don’t automatically mean large profits. Sellers often focus on the top line (sales) and ignore the bottom line (profits), missing the fact that some high-selling products have razor-thin margins. Without a clear understanding of how much you’re making after all expenses, high sales could be masking low or negative profitability.
How to Avoid:
Prioritise profit over sheer sales volume. Analyse your sales by product category and identify which items offer the best margins, even if they don’t generate the highest revenue. This will help you focus your marketing efforts on more profitable products, and you’ll avoid wasting resources on items that look good on paper but don’t contribute meaningfully to the bottom line.
6. Failing to Adjust for Seasonal Trends
Seasonality can have a big impact on both costs and demand. During peak seasons, like holidays, shipping costs can skyrocket, and many sellers don’t account for how these higher expenses impact their profit margins. Additionally, products that sell well in one season may languish on shelves during other times, resulting in lower margins due to storage and handling costs.
How to Avoid:
Monitor seasonal trends and adjust your pricing, inventory, and marketing strategies accordingly. By reviewing historical performance year-over-year, you can anticipate periods of high demand and increased costs, allowing you to manage your stock and pricing more effectively. Adjust your marketing to focus on high-demand items during peak seasons while being prepared for slower periods to maintain profitability.
7. Not Considering Inventory Holding Costs
Inventory management is a key factor in eCommerce profitability, but many sellers don’t fully consider the costs associated with storing their products. Whether you use a fulfilment centre like Amazon FBA or a self-run warehouse, storage fees, handling, and even slow turnover can all drain profitability. Unsold inventory sitting in a warehouse ties up capital and leads to higher holding costs.
How to Avoid:
Factor in inventory storage costs when calculating profit margins, especially if you rely on third-party fulfilment centres like Amazon FBA. Keep an eye on your inventory turnover rate—how quickly you’re selling products. Slow-moving items increase holding costs and reduce your overall profitability. Implement inventory management practices like just-in-time (JIT) stocking to minimise these costs.
8. Inaccurate Currency Conversions
If you sell internationally, currency conversion rates and fees can significantly impact your profit margins. Fluctuations in exchange rates can either work in your favour or erode profits, and many sellers fail to account for this volatility when calculating their margins. Additionally, conversion fees charged by payment processors can eat into your bottom line.
How to Avoid:
Stay on top of currency exchange rates, especially when dealing with multiple currencies. Make sure you’re factoring in any conversion fees when calculating your profit margins. Many payment processors allow you to lock in exchange rates for a period of time, which can provide some stability. Use financial tools or platforms that provide real-time conversion tracking so you can keep an accurate measure of your international profitability.
9. Neglecting to Account for Discounted Sales
Offering discounts, promotions, and sales can be an effective way to boost revenue, but if you don’t account for how these affect your profit margins, you might end up losing money on high-volume sales. Sellers often forget to factor in how offering a discount reduces their net profit on each transaction.
How to Avoid:
When running promotions, always factor in the discount when calculating profit margins. Be strategic about when and how often you offer discounts, making sure they still allow for profitability. Promotions can help move stock quickly, but they shouldn’t be used as a crutch for driving sales at the expense of profit. Use sales data from previous promotions to understand which discounts work best while maintaining healthy margins.
10. Lack of Regular Profit Margin Monitoring
Some sellers make the mistake of only reviewing their profit margins occasionally, leading to missed opportunities for adjustments. eCommerce markets and costs change rapidly, and without regular monitoring, you might not notice shifts in profitability until it’s too late.
How to Avoid:
Set up regular profit margin reviews using automated tools that can provide real-time insights. Monitoring your margins consistently helps you catch issues early and make necessary adjustments, such as tweaking pricing or cutting costs. Consider doing weekly or monthly reviews to ensure your business is always operating profitably, and adjust your strategy based on current performance and market conditions.
Conclusion
Tracking profit margins accurately is essential for the long-term success and sustainability of any eCommerce business. By avoiding common mistakes—like ignoring hidden costs, overlooking shipping fees, and failing to account for returns or advertising spend—you can ensure your business stays profitable. Properly monitoring margins, understanding the impact of discounts, and adjusting for seasonal trends are just a few ways to protect and grow your bottom line.
How Seller Margins Can Help
Seller Margins is designed to eliminate these pitfalls by providing eCommerce sellers with comprehensive, real-time insights into every aspect of their costs. By automating the tracking of hidden fees, shipping costs, and currency conversions, SellerMargins.io ensures that no expense goes unnoticed. With tools that connect ad spend to specific sales and allow for regular margin monitoring, Seller Margins helps you make smarter, data-driven decisions that keep your business profitable.
Incorporating these strategies, along with using a platform like Seller Margins, will empower you to stay on top of your margins, allowing you to scale your business confidently and sustainably.