Gross margin
Gross margin is what's left from the selling price after subtracting direct order costs: product price, shipping, packaging, and the share of rejected orders. Express it as an amount per order or as a percentage of selling price, and it doesn't subtract advertising or fixed expenses. It's the pool that ad spend and everything after draws from.
Also calledGross profit marginGross margin ratioGross profit
The formula
Gross margin = Selling price − (Product cost + Shipping + Packaging + Returns share), and ratio = Margin ÷ Selling price
- Selling price: the amount collected from the customer at delivery.
- Product cost: the purchase price of the unit from the supplier, including shipping to your warehouse.
- Shipping and packaging: delivery cost to the customer and packing material cost, per shipped order.
- Returns share: cost of rejected packages spread across the count of delivered orders.
- Does not include: advertising, subscriptions, rent, fixed salaries.
Worked example
A product priced at 3,900 DZD in Algeria
- 1Selling price to customer: 3,900 DZD.
- 2Product cost 1,300 DZD, shipping 500 DZD, packaging 100 DZD.
- 3Returns: out of 100 confirmed orders, 70 deliver and 30 refuse. Return cost per package 300 DZD, so 30 × 300 = 9,000 DZD spread across 70 delivered = 129 DZD per order.
- 4Gross margin: 3,900 − 1,300 − 500 − 100 − 129 = 1,871 DZD.
- 5Margin ratio: 1,871 ÷ 3,900 = 48%.
Takeaway: Each delivered order leaves 1,871 DZD to cover advertising, fixed costs, and profit—this is the number you measure order cost against.
What it means in practice
Gross margin is the first number you must know before running any campaign, because it sets how much you can afford per order. Without it you're betting that advertising costs less than something you don't know.
In COD, gross margin only completes after you subtract rejected package costs. A package the customer refused cost shipping both ways and sold nothing, and the delivered orders bear that cost.
Calculate margin per product, not store-wide. A store at 45% average may hide a product at 20% that eats most ad budget and pulls the whole result down.
Review margin every time supplier price, exchange rate, or shipping rates change. Margin is a moving number, and keeping it in an old file is riskier than not calculating it.
Common mistakes
- Counting the selling price including shipping fees the customer pays without subtracting actual shipping cost, inflating margin on paper.
- Using an old supplier price after their rates climbed or exchange rates shifted.
- Forgetting the cost of rejected packages—the biggest line item separating paper margin from real margin in COD.
- Confusing gross margin with net margin and thinking 45% gross margin means 45% net profit.
Questions and answers
What's the difference between gross margin and net margin?
Gross margin subtracts only direct order costs: product, shipping, packaging, and returns. Net margin subtracts after that advertising, subscriptions, salaries, and fees, showing what's actually left. The first measures product fitness, the second measures project fitness.
How high should gross margin be in COD?
Higher is safer because advertising and returns will eat into it. No fixed rule, but a low-margin product needs very low order cost and high delivery rate to stay profitable—meeting both is harder than lifting margin.
Do I factor in returns cost in gross margin?
Yes in COD. Divide this month's total rejected package costs by this month's delivered order count, then subtract the result from each delivered order. That way margin reflects what you actually collect, not what you assume.
Do confirmation call costs go into gross margin?
If the team gets a per-order commission, it's a variable cost and goes in. If it's a fixed monthly salary, it's best in fixed expenses and subtracted when calculating net margin. The key is don't drop it from the math either way.
Sources
- 1.COD profit calculator · SymplysisAI