More e-commerce revenue, less profit: where is your margin going?

Recognise when growth is putting returns under pressure

Revenue and order volumes are rising, yet contribution is falling. Return costs are increasing or the team is handling more exceptions manually. These are signals to investigate the costs and workload behind the growth before increasing investment.

Four financial definitions

Revenue means sales income excluding VAT, after discounts and refunds. Money returned to customers should not remain in the figure used to assess earned revenue.

Gross margin is revenue less the cost of the products sold. It does not yet account for marketplace fees, delivery or customer acquisition.

Contribution after variable costs is the amount remaining after costs that vary with the sales activity being assessed. These can include commissions, order processing and returns handling. We include advertising where expenditure varies with that activity, while keeping fixed campaign or agency costs separate.

Operating profit also reflects other business expenses, including salaries, premises and depreciation. Contribution is therefore not net profit.

Agree these definitions before comparing channels. Otherwise, two reports can present very different margins for the same product simply because they include different costs.

Where the return can disappear

Begin with the price customers actually pay. An attractive margin at the recommended retail price offers little reassurance if most orders depend on discounts.

Next, examine product costs. Supplier increases, inbound transport or a shift towards lower-margin products can change the economics. Match costs to the products sold rather than deducting all stock purchased during the month.

Then consider platform commissions, fulfilment, packaging, shipping and any payment or transaction charges. A lower-priced product may leave limited room after these costs, even when demand is strong.

Returns need separate attention. Deduct refunds from revenue without counting them again as an expense. Also assess return transport, inspection, repackaging and write-offs where products cannot be resold.

Advertising and additional operational work matter too. More orders can mean more customer questions, manual corrections and exception handling.

Distinguish direct from indirect costs, and variable from fixed costs. These are different classifications. A marketplace subscription may be directly attributable to a channel but remain fixed within the period. An employee’s salary does not increase automatically with every additional order.

Look at product and channel together

A profitable account can contain products that lose money. A small group of strong sellers may compensate for weaker items, making the overall result appear healthier than the assortment underneath it.

The reverse can also happen: a product with a reasonable gross margin becomes unattractive through one channel because the selling price, acquisition costs or delivery requirements differ.

Assess product-channel combinations. Compare the same item across your webshop and marketplaces using the revenue and costs that actually apply to each.

Allocate shared costs carefully. A campaign supporting several products may not allow precise order-level allocation. Use an explainable approach, state the uncertainty and consider whether another reasonable allocation would change the decision.

Do not judge contribution percentages in isolation. A smaller percentage can still produce a useful cash contribution at sufficient volume. Assess the amount, percentage and workload together.

Our marketplace selection framework examines wider channel choices. Here, the priority is understanding the economics of activity already under way.

A fictional example: sales rise while contribution falls

The following example is entirely fictional. All amounts exclude VAT. Revenue is already adjusted for discounts and refunds. Costs relate to sales in the same period, and all listed costs are treated as variable for this illustration.

The returns line covers additional handling and write-offs, not refunds already deducted from revenue. None of the figures represents current platform pricing.

Revenue increases by 26%, but contribution falls by €5,800. As a share of revenue, it declines from 18% to approximately 5.1%.

This does not establish the cause. Changes in product mix, discounting, advertising expenditure or returns could all contribute. It does show why rising sales alone cannot tell you whether further investment is sensible.

Assess the result through four questions

For each important product-channel combination, ask:

1. Revenue: is growth driven by stronger demand, lower prices or a different product mix?

2. Contribution: what remains per sale and in total after the agreed costs?

3. Returns: which products come back, why, and with what financial consequences?

4. Operational workload: how much work does the activity create, particularly through errors and exceptions?

Different answers justify different decisions.

Optimise when contribution is positive but an avoidable cost consumes too much of it. Reprice when the realised selling price leaves insufficient room and a different price remains commercially credible.

Limit a promotion or part of the assortment when additional sales consistently produce negative contribution. Investigate further when missing data or temporary conditions could distort the result.

An introductory campaign may deliberately require investment. Make its budget, duration and review criteria explicit rather than allowing an exception to become the permanent operating model.

Address the largest controllable loss first

Compare potential improvements by financial impact, influence and effort. A recurring expense across many orders often deserves attention before a small saving that requires extensive system changes.

Increasing volume does not automatically fix negative contribution per order. Something needs to change in pricing, product mix or the cost structure.

Also record the demands on your team. When employees absorb more work within their existing hours, the business may not receive an additional invoice. However, that workload can displace valuable commercial improvements. Show this separately and avoid deducting the same salary twice.

Our guide to prioritising e-commerce growth explains how to turn competing improvement opportunities into a manageable plan.

Start with one channel and a small product sample

Choose one important channel and, for example, five to ten products. Include major revenue generators, items with frequent returns and products whose margins appear uncertain.

For a representative period, bring together revenue, product costs, channel expenses, advertising, returns and additional work. Identify missing information rather than filling gaps with unexplained averages.

Select one improvement, give it an owner and agree when its effect will be reviewed.