How To Calculate Gross Margin Percentage

The Gross Margin Percentage is a key metric that you need to use along side total revenue in your web analytics and reporting tools. The reason for this is that you really need to use profit rather than simple revenue to determine the true value of your campaigns.

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The formula for Gross Margin Percentage is:

Where the value for Cost of Goods Sold includes the purchase price as well as other variable costs such as handling and advertising costs.

The Gross Margin Percentage can then be used alongside the measures that you get from Google Analytics to calculate the total gross profit for the campaign, from which you can then deduct your costs.

In the following screen shot the “B Campaign” generated $82,526 in revenue and 1,067 sales at an average price of $77.34.

Using the Gross Margin Percentage method we can estimate the profit for this campaign.

Let’s assume for the purposes of this scenario that the average cost to deliver these products is $50 and the allowance for advertising expense is to be a maximum of 20% of gross profit. (Note it is better to work with the actual figures rather than averages, but this makes the illustration simpler).

Our average Gross Margin percentage is therefore:

Our estimated gross profit for this campaign is therefore:

$82,526 x 28.31% = $23,366.70

Assuming that our costs for the B Campaign were no greater than $5,836. This figure is derived from the allowance for advertising expense of $5.47 per say multiplied by 1,047 sales.

Once we know the full costs to execute the B Campaign once it has concluded or reached a milestone (such as the weekly cycle) we can calculate the profit for this campaign.

Let’s say that the Actual Campaign Costs were $7,500 then the profit would be

Profit=$23,366.70-$7,500+$5,836

= $21,702.70

It is important to understand that there will be rounding and other small errors in this approach to the calculation of profit as it is based on average costs across each product sold in the campaign.

 

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