Key takeaways
- Gross margin ($) = revenue − COGS; gross margin (%) = (revenue − COGS) ÷ revenue.
- Healthy gross margin on hero SKUs can hide accessories or promo SKUs that drag the blend.
- Break-even ROAS ≈ 1 ÷ gross margin %—a quick ad floor before shipping and fees.
- Contribution margin is gross margin minus order-variable costs—use it for payback and LTV.
- Model margin and ROAS together in the Ecommerce Simulator before you scale spend.
Definition
Gross margin — revenue minus COGS (product cost, typically landed). It is the first profitability layer after merchandise: what is left before shipping, payment fees, returns, marketing, and overhead.
Gross margin formula
Gross margin ($) = Revenue − COGS
Gross margin (%) = (Revenue − COGS) ÷ Revenue × 100
Example: $80 AOV, $34 COGS → gross margin $46, gross margin % = 57.5%. If COGS excludes inbound freight you actually pay, gross margin is overstated—align COGS with how finance values inventory.
What gross margin hides
- Shipping and fees — 60% gross margin with $14 net shipping and 3% payment fees leaves far less for ads than the headline suggests. See contribution margin.
- Returns — apparel with 18% refund rate clawbacks product margin after the sale. Refund rate belongs below gross margin in unit models.
- Mix shift — bundles and gifts can raise revenue while lowering blended gross margin %.
- Promo depth — discounting cuts effective revenue while COGS is fixed per unit—margin % collapses.
- Break-even ROAS illusion — 1 ÷ gross margin % is a floor, not a growth target; overhead and profit need higher ROAS.
Gross margin vs contribution margin
| Metric | Subtracts | Best for |
|---|---|---|
| Gross margin | COGS only | Pricing, sourcing, SKU mix, quick ROAS floor |
| Contribution margin | COGS + shipping + fees + returns + variable fulfillment | CAC payback, LTV, ad scale decisions |
| Net margin | All costs including overhead | P&L profitability |
Worked example: break-even ROAS from gross margin
Brand A: 45% gross margin → break-even ROAS ≈ 1 ÷ 0.45 = 2.22×. Brand B: 28% gross margin → break-even ≈ 3.57×. Same $100,000 ad spend at 3.0× ROAS ($300,000 attributed revenue):
- Brand A gross profit ≈ $300,000 × 0.45 = $135,000 — above $100,000 spend.
- Brand B gross profit ≈ $84,000 — below spend before shipping or overhead.
Brand B needs higher ROAS or better margin before scaling. After $9 average shipping and fees per order, Brand A contribution might be ~32%—break-even ROAS rises to ~3.1×. That is why operators graduate from gross margin to contribution for paid decisions.
Break-even ROAS ≈ 1 / gross margin % is a fast planning floor. Add shipping, fees, and returns in contribution margin before you treat ROAS as profit.
Source: Growthegy margin break-even store guide (2026)
How to use gross margin in the Ecommerce Simulator
In the Ecommerce Simulator, set gross margin or COGS %, then add shipping and fee assumptions to see contribution and break-even ROAS move. Run margin-first:
- Drop COGS 3 points via supplier renegotiation—how much does break-even ROAS fall?
- Raise AOV with a bundle—does gross margin % hold?
- Compare reported ROAS to break-even before increasing spend.
Related guide
Read margin and break-even ROAS store guide, how to analyze product profitability, and ROAS vs ROI. Stack with gross profit, unit economics, and MER.
Related terms
- COGS — subtracted to get gross margin.
- Contribution margin — next layer down.
- ROAS — compared to break-even from margin.
- AOV — revenue input to margin dollars per order.
Back to the ecommerce glossary. Gross margin is the merchandise scorecard—pair it with contribution before you trust ad dashboards.