What margin really is. And why it decides everything.

You can sell more and make less. It happens when the margin on the extra orders cannot cover the cost of winning them. Before touching your campaigns, work backwards from the money each order leaves behind.

Start with revenue you can keep

If a standard-rated product sells for £60 including 20% UK VAT, your revenue excluding VAT is £50. The remaining £10 is output VAT, not money available for advertising. Dividing by 1.2 removes VAT; subtracting 20% from the gross price does not.

Now subtract the landed product cost: purchase price, inbound transport, duties and any other direct cost of getting the item ready to sell. If that total is £25 excluding recoverable VAT, your gross profit is £25 and your gross margin is 50%.

Margin is different from markup

Buying for £25 and selling for £50 gives you a 100% markup on cost, but a 50% margin on revenue. Confusing the two can double what you think you can afford to spend. Always label the denominator in your spreadsheet.

Gross margin is only the starting point

That £25 still has work to do. Subtract payment fees, packaging, fulfilment, any delivery subsidy and expected returns. Suppose these add up to £7 per order. You have £18 of contribution before advertising: 36% of your £50 net revenue.

Spending £18 to acquire that order uses the entire contribution. It leaves nothing for rent, software, salaries, agency fees or profit. If you want £8 left towards those costs, your allowable acquisition cost is £10.

Calculate it by product group

A store-wide average can hide the products that lose money. Group your catalogue by similar economics: landed cost, selling price, return rate and delivery cost. A bulky item and a lightweight accessory should not automatically share the same advertising target.

Export product sales and refunds from Shopify or WooCommerce for a representative period. Join them to supplier costs using SKU, check missing costs manually, and include discounts. Use realised selling prices, not the prices you hope to charge.

Do this before your next budget increase

1. Choose your ten largest product groups by revenue.
2. Calculate net revenue and contribution before advertising for each.
3. Allow for fixed costs and the profit you need to retain.
4. Set an acquisition-cost ceiling for each group.
5. Check whether the extra stock and advertising can be funded before the cash comes back.

Refresh the numbers when suppliers change prices, you run a promotion or returns rise. Your margin is a decision rule, not a figure to calculate once and forget.

Examples are illustrative, not client results. VAT examples assume a VAT-registered UK business selling standard-rated goods, with recoverable input VAT excluded from costs. Check your own product and tax treatment with your accountant. UK VAT rates. Irish stores should use their applicable local VAT rate, not the UK example.

Put it into practice

Bring your store’s numbers to the conversation. We will start there.