How to Calculate Incremental Margin in e-Commerce (Formula + Explanation)

Are you new to the big, wide world of e-commerce analytics? Do you find it complicated and overwhelming? Well, you're not alone. Even some of the more experienced sellers are constantly looking for new ways to advance their insights and optimize their decisions. Calculating and understanding incremental margin is a useful metric to help you dig deeper into your profitability and growth.

» Worried about your profit margins? Explore how to increase your e-commerce profit margin

Understanding Incremental Margin

Let's start right at the beginning.

Margin is the profit you make from selling your products or services, thereby giving you perspective on the overall financial health of your business.

Incremental margin is the profit you make from selling an incremental unit of your product or service. In other words, it measures how your profits change because your sales volume has changed. This feeds directly into the growth of your business, because incremental margin will help you make predictions about your business's future performance. In comparison, margins reflect your business's current performance only.

Formula

Use this formula to calculate your incremental margin:





Incremental margin can be expressed as a percentage. It measures how a specific profit metric has changed in relation to any changes that occurred in revenue. Therefore, you can customize the formula according to which data you want to analyze (e.g., net profit margin, gross profit margin, EBITDA margin, etc.). The different metrics will have different increments.

Common Profit Margin Metrics to Calculate Incrementally

Gross Profit Margin

Use this formula to calculate your gross profit margin:





Gross profit margin tells you how much profit you've made after you've deducted the cost of goods sold (COGS). This refers to the direct costs that are associated with the production of the products or services you sell.

Gross profit margin provides perspective on your business's profitability, but because it focuses on direct costs only, it also comments on the management of these costs. A low gross profit margin may indicate operational changes are necessary.

» How do you calculate COGS? Follow this easy guide

EBITDA Margin

Use this formula to calculate your EBITDA (earnings before interest, taxes, depreciation, and amortization) margin:





EBITDA margin measures how much your business earns before interest, taxes, depreciation, and amortization. Calculate your earnings by deducting operating expenses (COGS, selling, general, and administrative expenses) from your sales revenue.

EBITDA margin is also known as a profitability ratio. Specifically, it indicates whether your business has a healthy cash flow because the calculation doesn't take non-cash expenses into consideration.

Net Profit Margin

Use this formula to calculate your net profit margin:





Unlike your gross profit margin, your net profit margin accounts for all your expenses. Calculate your net profit margin by deducting COGS, interest, taxes, operating, and other expenses.

Net profit margin is easily the most important profitability analysis calculation. Ultimately, it tells you whether your current practices are working because it checks that you're generating enough profit while keeping your expenses under control. You can also use this metric to compare your business's performance across different reporting periods, thereby setting benchmarks for yourself.

Operating Margin

Use this formula to calculate your operating profit margin:





Your operating profit margin is a performance ratio. It tells you the percentage of profit your business makes from sales after paying for production, but before deducting interest and taxes.

Operating profit margin, also known as Return on Sales (ROS), checks whether you manage your sales effectively, i.e., can you produce profits just from your core operation? If not, then it means most of your revenue is coming from another source—and not the product or service you're selling.

» How do you evaluate profit margins? Find out how to determine high profit margins

Best Practices for Interpreting Incremental Margin

Make sure you're working with correct and useful data. There's no point in calculating incremental margin if it's going to be incorrect. Consider investing in a profit calculator tool to help you manage your data and calculations. BeProfit allows you to connect all of your e-commerce stores to one platform with an aggregated view of your business performance.

Also, realize that calculations can vary, especially if you're in manufacturing and dependent on external factors. View your incremental margin realistically and investigate when it indicates problems.

» Need help calculating your profits? Let BeProfit help