Calculating Product Profit Margin in Shopify Stores
Learn the correct way to calculate the net profit margin for individual products sold in Shopify stores. Understand which costs to include and which to exclude to identify winning and losing products.
It’s often assumed that the products with the highest sales generate the most revenue for your business, but how accurate is this? What if those sales only cover your costs or yield minimal profit despite the high volume?
A high sales volume does not always mean high profit; in some cases, it can even mask weak margins. To truly understand your store’s performance, you need to look beyond revenue and units sold. By breaking down profit margins for each product, you can tell whether your lineup is truly driving returns for the effort, time, and money you invest.
In this brief guide, you will learn how to assess your products from a profit perspective – identify the costs and revenues associated with each product, determine your high-performing items, spot the profit drainers, and refine your product range to grow your business from the bottom line up, not just through sales.
Calculating Gross Profit of Shopify Products
Calculating product-level profits is quite different from calculating overall business profitability. For overall business profitability, expenses are shared across all products. When analyzing a product’s performance, we focus only on costs that can be directly tied to that product variant. This includes the product cost (COGS), discounts, and refunds. By deducting these direct costs, we can calculate gross profit, which opens the door to smarter pricing decisions.
To calculate the profit performance of the product, let’s begin from scratch,
1. Find the Gross Merchandize value (GMV)
GMV= Product Price * Quantity Sold
2. Deduct discounts to arrive at Gross Revenue
Gross Revenue = Gross Merchandise Value (GMV) - Discount
3. Deduct refunds to get Net Revenue
Net Revenue = Gross Revenue - Refund
4. Finally, deduct the costs incurred in procuring or producing the product (COGS) to arrive at your gross profit and margin. This gives you the actual profit contributed by that product.
Gross Profit of a Product = Net Revenue - Cost of Goods Sold
Gross Profit Margin = Gross Profit / Net Revenue * 100
By comparing across different products, you can now pinpoint which items are driving the most value, which are draining your resources and which areas of your pricing or costs need optimization.
Now you may wonder, shouldn’t shipping costs be part of a product’s profit calculation?
Shipping in Shopify is attributed at the order level, not the product level. Orders may contain multiple products, but Shopify treats shipping as a single value. Splitting it across products can duplicate costs or misrepresent value, so it’s excluded from gross profit.
Now you know where the direct costs are pulling their weight, but what about indirect costs such as marketing and operational expenses? Do they not impact overall product profitability?
Of course, they do! However, calculating net product profit can be tricky, as many of these costs are shared and can’t be allocated accurately. Still, analyzing the costs you can track shows valuable patterns and helps you make informed pricing decisions.
Let’s look at that in detail in the next section.
How to Calculate Net Profit of Products in Shopify ?
To calculate net product profit use the formula:
Net Profit of Product = Gross Profit - Ad Spend
Typically, net profit is calculated by deducting indirect expenses (ad spend & operational) from gross profit. So, why is it different here?
Because operational expenses reflect the overall costs of running the business. Many line items are not tied to specific products (like salaries & subscriptions) and splitting them accurately across individual products is challenging.
So, the most accurate way to calculate per-product profit is to deduct ad spend directly linked to each product from its gross profit. Ensure that you link campaigns, ad groups, or individual ads (depending on the platform) to each product to calculate the product’s net profit. This approach helps determine actual costs and true margins, reveal opportunities for optimization, and ultimately improves overall business growth.
P.S/warning icon: When analyzing product-level profit, only paid marketing efforts that can be directly attributed to products matter. You don't need to consider organic or general marketing efforts (like SEO, brand awareness or social media content), because they affect overall business performance, not individual product profitability. If you want to measure marketing efficiency across all channels, you can calculate MER.
Conclusion
A product’s success or failure often depends less on demand and more on how it’s priced, marketed, managed, and supported operationally. That is why analyzing product profitability is so important.
Drilling down to product-level profit has limitations, as shared costs like shipping, advertising, and operational expenses can’t always be accurately assigned to individual items without creating errors or misrepresenting profitability.
Even so, you don’t need perfect numbers to gain meaningful insights. Tracking the costs you can measure still gives a clear approximate view of which products generate profit and which drain resources. These insights let you focus time, money, and effort on products that truly drive sustainable growth, not just high sales.
