What is Gross margin?

How to calculate gross margin for an Amazon product

Start with net revenue: gross sales minus customer refunds and returns for the period. Then subtract COGS, which for a physical product is the landed cost of the units actually sold, not the units you bought. Landed cost includes the supplier price plus inbound freight, duty, and any prep or labeling. Divide the result by net revenue and you have your gross margin percentage.

Note what is deliberately excluded. Amazon referral fees, FBA fulfillment fees, storage, and advertising are not COGS in the strict accounting sense; they are operating expenses that hit further down the P&L. Mixing them into COGS gives you a hybrid number that is neither true gross margin nor net margin. Keep the layers separate so each one tells you something distinct.

The 'units sold, not units purchased' distinction deserves emphasis because it's where most spreadsheet margins go wrong. If you buy 1,000 units in March and sell 300 of them in April, April's COGS is the landed cost of 300 units. The other 700 sit on the balance sheet as inventory until they sell. Expense the whole purchase in March and you get a catastrophic March margin followed by months of fictional 100% margins, and neither number can guide a single decision.

• •Net revenue = gross sales − refunds and returns
• •COGS = landed cost of units sold (product + freight + duty + prep)
• •Gross margin % = (net revenue − COGS) / net revenue
• •Exclude Amazon fees and ad spend from COGS; they belong lower in the P&L
• •Use cost of units SOLD, not units purchased, to avoid distorting the period
• •Unsold units stay on the balance sheet as inventory until they sell

A worked example: one SKU, layer by layer

Say you sell a garlic press at $24.99. Your supplier charges $4.80 per unit, inbound ocean freight works out to $0.90 per unit, duty adds $0.35, and FBA prep runs $0.25. Your landed cost is $6.30. In a month where you sell 1,000 units and refund 40 of them, net revenue is roughly $23,990 (1,000 sales minus 40 refunds at $24.99, ignoring pennies). COGS is $6,300 if refunded units don't come back sellable, so gross profit is about $17,690 and gross margin lands near 74%. Every number here is hypothetical, but the structure is exactly how you should build the calculation.

Now watch how the same SKU looks at the net line. Suppose the referral fee and FBA fulfillment fee together take about $9 per unit (check current fee schedules for your category and size tier; these vary), and you spend $3,000 on ads for the month. Fees consume roughly $8,640 across 960 net units, ads take $3,000, and suddenly your $17,690 gross profit is closer to $6,000 before storage, returns processing, and overhead. A 74% gross margin became roughly a 25% net-of-fees margin, and that's a healthy outcome. Start with a 45% gross margin and the same stack buries you.

This is the practical use of the worked example: run it before you source, not after. Plug your expected price and quoted costs into the same waterfall and see what survives. If the answer is thin at optimistic assumptions, it will be negative at real ones.

Gross margin vs net margin: why Amazon sellers confuse them

Gross margin measures product profitability before the cost of running on Amazon. Net margin is what survives after referral fees, FBA fees, storage, advertising, returns processing, and overhead. On Amazon the gap between the two is enormous, because the platform's fee stack and ad spend can swallow 30 to 50 percent of a sale. A product with a strong 60 percent gross margin can still finish at a thin net margin once the full cost stack is applied.

This is why gross margin alone never tells you whether a SKU makes money. It tells you whether there is enough room in the product to survive the Amazon cost stack. If gross margin is already thin, advertising and fees will push the SKU underwater. Sellers who track only revenue and gross profit margin on Amazon routinely scale products that lose money at the net line.

What a healthy Amazon gross margin looks like

There is no single correct number, because it depends on your category, your fee burden, and how aggressively you advertise. As a working rule, many private-label sellers want gross margin high enough that net margin still lands in a comfortable double-digit range after fees and ads. If your referral fee, FBA fee, and advertising together consume a large share of price, you need a higher gross margin just to break even.

The discipline is to model the full stack before sourcing. Take your expected price, subtract the landed cost for gross margin, then layer in referral fee, FBA fee, storage, returns, and a realistic TACOS for advertising. The remainder is your real profit. Fee rates vary by category and change over time, so pull current rates from your own settlement data rather than assuming.

Benchmarks from outside your own model deserve care rather than imitation. Sellers look up Walmart's gross profit margin, or Amazon's own reported figures, and wonder why their numbers look nothing alike. A retailer at Walmart's scale earns a gross margin in the low-to-mid twenties and a net profit margin of a couple of percent (the current figures sit in its annual 10-K, and they move year to year), because the model is colossal volume on razor spreads, backed by supplier payment terms that let it sell stock before the invoice comes due. You have neither the volume nor those terms. Walmart's profit margin describes scale economics, not a target for a third-party seller. The comparison worth making is against a seller in your model and category, and failing that, against your own SKU last quarter.

If you sell on Walmart Marketplace alongside Amazon, split the calculation by channel. Landed cost is identical, so gross margin should match on both, while the fee stacks differ enough that net margin won't. That divergence is useful rather than annoying: matching gross margins with different net margins tells you the channel is the problem, and a gross margin that differs between channels tells you your cost data is wrong somewhere.

Business model matters too, so don't compare across models blindly. Private-label sellers typically need high gross margins because they carry the whole ad burden. Wholesale and arbitrage sellers run structurally thinner gross margins but spend little on advertising and turn inventory faster. A 25% gross margin can work for a wholesale operation moving volume with near-zero ad spend, while the same margin would be fatal for a private-label launch. Judge your margin against your own model's cost stack.

Why accurate gross margin depends on accurate COGS

Gross margin is only as honest as the COGS feeding it. If your unit cost is a rough guess, your margin is a rough guess. The two common failures are using supplier price alone (ignoring freight and duty) and using a static cost across price changes (ignoring that newer inventory cost more). An inventory valuation method like weighted average cost or FIFO keeps your COGS current as costs shift.

Booked on an accrual basis with proper landed cost, gross margin becomes a number you can actually steer by. BeanHawk ties settlement revenue to per-unit landed cost so your gross margin reflects the units that truly sold in the period, which is the difference between a margin you can trust and one that flatters a failing SKU.

Common gross margin mistakes

When a seller's margin numbers mislead them, the cause is almost always on this list.

• •Computing margin from supplier price alone, ignoring freight, duty, and prep
• •Expensing whole inventory purchases in the month paid instead of matching COGS to units sold
• •Mixing Amazon fees or ad spend into COGS, producing a number that is neither gross nor net margin
• •Using gross sales instead of net revenue, so refunds silently inflate margin
• •Carrying a stale unit cost after supplier or freight prices moved
• •Averaging margin across all SKUs and missing the individual products that are underwater
• •Comparing your private-label margin to a wholesale seller's benchmark, or vice versa

Tracking gross margin in your bookkeeping stack

A spreadsheet can compute gross margin correctly for a handful of SKUs if you maintain landed costs by hand and remember to use units sold. Past that, the failure mode isn't the math, it's the upkeep: freight invoices arrive weeks after the goods, supplier prices drift, and nobody updates the sheet. Margin accuracy is a data-pipeline problem before it's an accounting problem.

This is the argument for wiring margin into your ledger rather than beside it. Good amazon seller accounting software pulls settlement revenue, splits out fees and refunds, and matches per-unit landed cost to each sale so gross margin falls out of the books automatically. If your ledger is QuickBooks, sellers typically pair quickbooks for amazon sellers with a settlement connector such as A2X, Link My Books, or BeanHawk; xero for amazon sellers works the same way on the Xero side. The differentiator for margin specifically is inventory support: many connectors post revenue and fees well but leave COGS as a manual monthly journal, which quietly reintroduces the guesswork you were trying to remove.

Whichever tool you evaluate, ask it one question: where does the unit cost come from? If the answer is 'you type in a percentage', your gross margin will only ever be as good as that guess. Real amazon fba accounting drives COGS from purchase orders and landed costs, revalues under weighted average or FIFO as new stock arrives, and lets you see margin by SKU by month. That per-SKU view is the payoff; portfolio-level margin hides exactly the products you need to kill.

Frequently asked questions

What is the gross margin formula?

Gross margin percentage = (revenue − COGS) / revenue. On Amazon, use net revenue after refunds and a fully landed unit cost for COGS, so the number reflects reality rather than just your supplier price.

What's the difference between gross margin and net margin on Amazon?

Gross margin is revenue minus product cost, before Amazon fees and advertising. Net margin is what's left after referral fees, FBA fees, storage, ads, and overhead. The gap is large on Amazon, so a strong gross margin can still produce a thin net margin.

Should Amazon fees be included in COGS when calculating gross margin?

No. Referral fees, FBA fees, storage, and advertising are operating expenses, not cost of goods sold. Keep them out of COGS so your gross margin isolates product profitability, then apply the fee stack separately to reach net margin.

What is a good gross margin for an Amazon product?

It depends on your category, business model, and fee burden, but you generally want gross margin high enough that net margin stays comfortably positive after fees and ads. Private-label sellers need more room than wholesale sellers because they carry the advertising burden. Thin gross margins rarely survive Amazon's full cost stack.

Why does my gross margin look wrong some months?

Usually because COGS is off: either it ignores freight and duty, or it uses a stale unit cost while your real cost has changed, or a whole inventory purchase was expensed in one month. Use a proper landed cost and an inventory valuation method like weighted average or FIFO so COGS tracks reality and margin stops jumping around.

How do I track gross margin by SKU without doing it all in spreadsheets?

Use accounting software that matches per-unit landed cost to each sale from your settlement data. The key feature to check is where unit cost comes from: tools that derive COGS from purchase orders and landed cost give you real per-SKU margin, while tools that apply a flat percentage just automate your guess. Compare A2X, Link My Books, and BeanHawk on this specific point.

Does QuickBooks calculate gross margin for Amazon sellers?

QuickBooks reports gross margin from whatever revenue and COGS you post to it, but it can't parse Amazon settlements or track per-unit landed costs by itself. Paired with a connector that posts clean settlement journals and real COGS, its margin reports become trustworthy. Without that, the margin line reflects your data entry, not your business.

Do refunds affect gross margin?

Yes, twice. Refunds reduce net revenue directly, and when refunded units come back unsellable you still carry their COGS, which compresses margin further. Track refund rates by SKU: a product with a high return rate can show an acceptable margin on gross sales and a poor one on net revenue.

Related terms

Go deeper

• Amazon Profit Margins: The Real Cost Stack From Sale to Net
• The Profit and Loss Statement, Explained for Ecommerce Sellers