eCommerce Gross Margin Paradox - More Money By Selling Less

Ever catch yourself thinking, "I'd love to raise my prices, but I'll lose all my customers"?

Here's the mind-bending truth: Sometimes making fewer sales at higher prices puts more money in your pocket than grinding out higher volume at razor-thin margins.

But here's the real kicker - you can't know if this is true for your business unless you understand one critical number: your gross margin.

Most ecommerce founders obsess over revenue numbers but completely miss the fact that higher sales don't always equal more profit. Sometimes they actually mean less.

Think I'm full of it? Let me show you something that might change your mind.

In this guide, we're going to break down:

• Why your gross margin is the reality check your business needs
• How to actually calculate if raising prices will make (or lose) you money
• The three levers you can pull to improve your margins
• Why some of your "best-selling" products might be your worst performers

No BS, no complicated formulas - just straight talk about making your ecommerce business more profitable.

What Is eCommerce Gross Margin (And Why Should You Care)?

Your gross margin is basically a reality check on whether your product has any real chance of success in the market. 

Think of it as the truth-teller of your business - it shows you how much profit you're actually generating from each sale.

Let's break down exactly how it's calculated in a way that actually makes sense:

1. Start with your net revenue
   
   • Take your gross sales
   • Subtract any discounts
   • Subtract returns/refunds
   • Add in what you charge for shipping
2. Then subtract your COGS (Cost of Goods Sold)
   
   • The cost of your product
   • Plus the cost of shipping to customers

Your gross profit is what's left over after these calculations. 

Divide that by your net sales, and you've got your gross margin percentage.

Gross Profit vs. Gross Margin: What's the Difference?

These numbers are cousins, but they tell you different things:

Gross Margin (%) is like your business's vital signs. It shows you if your profitability stays healthy as you scale up or down. Generally, this number should get better (or at least not worse) as you grow.

Gross Profit ($) is the actual cash you're generating from all this activity. This is what pays for everything else in your business.

Here's the interesting part: Sometimes it makes sense to let your margin dip a bit if it means you'll end up with more gross profit dollars overall. It's all about the balance.

Example: When more sales earn less money

Let's look at a real example that might make you rethink everything you know about "growing" your business.

So, over here in month one, we have a business that's doing 166k of gross sales. 

Month 1: The Baseline

• Gross sales: $166K
• Discounts: $18K
• Net sales: $148K
• COGS: $50K
• Gross profit: $98K
• Gross margin: 66%

Pretty solid numbers, right? Now here's where it gets interesting.

Now, let's say in month two they make a big push to sell more product. 

Month 2: The "Growth" Month

• Gross sales: $192K
• Discounts: $40K (more than doubled)
• Net sales: $152K
• COGS: $58K
• Gross profit: $94K
• Gross margin: 62%

Let me break down what actually happened here:

The company pushed HARD for more sales. 

They ran aggressive promotions, doubled their discounts, and yeah - their gross sales went up by $26K. 

Looks great on paper, right? 

But here's the kicker - they actually made $4K LESS in profit.

Why This Happened

Here's the thing about COGS - it doesn't care how much you sold the product for. 

If it costs you $10 to make and ship a product, that cost stays the same whether you sell it for $100 or give it away for $40 during a promotion.

In Month 2, they:

1. Pushed hard on promotions (more than doubled their discounts)
2. Increased gross sales by 16%
3. But only increased net sales by 3%
4. And actually LOST money in the process

The reality check? Revenue growth means nothing if your margins are getting destroyed in the process.

Ready to see how to avoid this trap and actually increase your profits? Let's look at how different sales channels affect your margins...

Understanding Margins Across Different Sales Channels

It's extremely valuable to look at your gross margin by channel because each sales channel has a very different cost structure. 

Let's look at this example where a brand is selling on Shopify, Amazon, and wholesale. 

Each sales channel comes with its own cost structure. Let's break it down:

Shopify (Your Own Store)

This is typically your highest margin channel. Why? You're in control:

• You set your own prices
• No marketplace fees eating into your margins
• You can optimize shipping costs
• Direct relationship with customers

Amazon

Expect slightly lower margins here because:

• 15% commission on most categories
• More pricing pressure (hello, competition)
• FBA fees can be higher than your own shipping costs
• But you get access to massive traffic

Wholesale

Lowest margins, but don't write it off:

• Yes, you're pricing way lower than retail
• But you're moving serious volume
• More predictable revenue
• Less marketing spend needed

Here's the mind-bender: Wholesale's 19% margin might actually put more money in your pocket than Shopify's 51% margin when you factor in volume.

Why This Matters for Your Strategy

If you're only looking at total margins across all channels, you're missing the plot. 

Breaking it down by channel helps you:

• Spot problems early (is one channel's margin slipping?)
• Make smarter growth investments
• Know which products to push where
• Set realistic targets for each channel

Product Level Margins: Where the Real Insights Hide

Another game-changing analysis is looking at your gross profit by product or product category. 

This is where you often find surprising insights about what's actually making (or losing) you money.

In certain industries like supplements, beauty, or apparel, your margin can vary wildly between products. This analysis tells you:

1. Which products deserve more marketing spend
2. Where you might be losing money without realizing it
3. How shipping costs impact different products

The Hidden Shipping Cost Trap

Shipping can completely destroy your margins, especially if:

• You offer free shipping over a certain threshold
• You have heavy or bulky products
• You don't factor in shipping when pricing

A lot of brands will have a free shipping threshold of "$50 or more" but don't consider that shipping a heavy product could cost them $15, turning what looks like a profitable sale into a loss.

3 Ways to Actually Improve Your Gross Margins

Let's dive into three real strategies to boost your margins - with actual examples showing how the numbers work.

1. Raise Your Prices (Yes, Really)

I know what you're thinking: "If I raise my prices, I'll lose customers." But here's the thing - that might actually be good for your bottom line.

Look at the numbers:

• Current: 2,300 units at $65 = $150,000 sales, $103,000 profit (69% margin)
• Price increase to $75: Even if you lose 300 customers, you still make $110,000 profit (73% margin)

The reality? You can afford to lose some customers if each remaining sale is more profitable.

2. Reduce Your Costs

There are several ways to cut costs without sacrificing quality:

• Negotiate with manufacturers
• Switch suppliers (carefully)
• Order in larger volumes
• Optimize shipping

Using our previous example:

• Current: $20 cost per unit = $46,000 COGS
• Reduced to $17 per unit = $39,000 COGS
• That's $7,000 more profit for the exact same sales

3. Optimize Your Product Mix

This is the trickiest strategy, but it can have the biggest impact. You need to:

1. Understand which products are most profitable
2. Know how products relate to each other
3. Make smart decisions about what to push vs phase out

Let's break down a real example of how changing your product mix can actually increase your profits - even when your total sales go down.

Here's what our product lineup looked like:

• Product A: Premium item with 75% margin
• Product B: Solid performer at 60% margin
• Product C: High volume but only 35% margin
• Product D: Niche product with best margin (80%)

Total sales were $290,000 with $162,500 in gross profit (56% margin).

The Strategy Shift

Looking at these numbers, we spotted something interesting - Product C was actually dragging down our overall profitability. 

Sure, it had the highest sales ($125,000), but its low margin meant we were working harder for less money.

So we made a bold move:

1. Completely dropped Product C
2. Doubled down on Product A (our premium product)
3. Kept Products B and D at their current volumes

You can see that:

• Total sales actually dropped by $37,500 (to $252,500)
• BUT gross profit increased by $21,875 (to $184,375)
• Overall margin jumped from 56% to 73%

By eliminating our highest-volume but lowest-margin product and redirecting those resources to our premium product, we made more money while doing less work.

Why This Worked

The success of this strategy hinged on understanding customer behavior. 

We realized that many Product C customers would shift to Product A if C wasn't available. 

This wasn't just luck - it was based on understanding our customer base and their buying patterns.

Remember: Not every customer will switch to your higher-margin products, but you don't need them all to. In this case, the math worked in our favor even with lower total sales.

So can you make more money by selling less?

We've covered a lot of ground here, from understanding basic margins to optimizing your entire product mix. Here's what it all comes down to:

Your gross margin isn't just a number - it's the foundation that determines whether your business can scale or will stall.

Key Takeaways:

• Higher revenue doesn't always mean more profit
• Each sales channel has its own margin profile
• Product mix can make or break your profitability
• Sometimes making less (sales) means making more (profit)

Next Steps

The strategies we've covered only work if you can actually see your numbers clearly. 

That means having solid accounting systems in place to track:

• Channel-specific performance
• Product-level profitability
• True COGS (including shipping)
• Real margin trends

Need Help Getting Clear on Your Numbers?

As an eCommerce accounting firm, we help brands get the visibility they need to make these kinds of strategic decisions. If you're looking to:

• Get better clarity on your margins
• Set up proper channel tracking
• Make data-driven pricing decisions

Feel free to reach out for help.

And while you're here, check out our video on eCommerce pricing tactics to improve your gross margin.