Profit Calculation

5 Mistakes to Avoid When Calculating Profit for Your Shopify Store

May 30, 2023 | By Irene Leander

Your Shopify store may succeed or fail depending on how you track and determine your profit. The point is that mistakes are so easy to make, which can lead to wrong profit calculations and misrepresentation of your Shopify store's actual financial health.

With a lot of factors, it is understandable that mistakes are common in Shopify profit calculations. By basing your strategic plans on inaccurate profit predictions, you run the risk of investing your money in the wrong things, spending more than you make, and putting your business' finances in jeopardy.

In this blog, we will look at some of the most frequent mistakes Shopify store owners like you will make when calculating profit and how to get rid of them with the help of TrueProfit.

Mistakes to Avoid When Calculating Profit for Your Shopify Store

Mistakes can happen to every aspect of your business operation. It is anybody’s wish to avoid or, at least, minimize them. Yet, it will only be a wish if you don’t first identify your mistakes and where or why they happen.

Having said that, we will show you the top 5 common mistakes you will face when calculating the Shopify profit of your store.

#1. Make assumptions

Data is your best friend. Your eCommerce business should take advantage of the data's availability, comprehend the story it is telling you, and act on it. Therefore, you should never rush into conclusions without enough data.

One of the big mistakes that you may encounter when calculating and analyzing your key eCommerce metrics is making assumptions. This practice is very dangerous since you can mislead and trick yourself into believing in something that you think is true when it might not.

Here are some wrong assumptions you may make during the time calculating your profits:

Assuming that the higher revenue, the higher profit without knowing that focusing on revenue only can harm your business
Assuming that all the products and customers bring in the same profitability. As a result, you will treat them equally. In other words, you invest more in promoting all the products or focusing on every customer segment.

#2. Leave out “insignificant” costs

When calculating profit for your Shopify store, costs such as COGs (cost of goods), marketing, and shipping are those frequently taken into account first, as they have an obvious impact on your profit. Yet, there are less obvious costs that could affect your profit calculation, even with just a small degree.

Your computation is bound to produce an inaccurate result if you underestimate and leave out “insignificant” costs from it. It is understandable that certain costs may slip through the cracks, given the large number of less obvious costs that are incurred.

Some of the most frequent costs that you possibly overlook or forget to track are as follows:

Returns & Refunds: Free returns are undoubtedly a significant component of your Shopify store, but they can significantly reduce your profitability. If you decide to offer free returns, there are a few expenses you will have to pay for: the cost of paying for the return shipment, refunding the buyer, processing the item's return into your store, and any fees associated with disposing of the item. It can be a serious risk to your store's profitability if you don't take the high return rate for eCommerce stores into account when setting your prices.
Payment processing fees: There is no way to avoid payment processing fees, so you'd better find ways to deal with them. These may include bank fees, credit card fees, and even payment processor fees. These costs, though little individually, can mount up and reduce your profit margin.
Third-party app fees: Many online merchants use apps to facilitate their business management, and maybe, you do too! Not just one but several ones. So, you should be carefully tracking the fees that these apps charge you, especially some expensive apps.
Outsourcing costs: The contractor's bid price, contract administration fees, and transition costs are included in the costs of outsourcing; they are subtracted from any additional income from the sale of unnecessary supplies, machinery, and furnishings.
Costs of professional services: Professional services include bookkeeping, tax preparation, website technical support, legal advice, and virtual assistance. Even if you might budget for some of these costs, there's a possibility one or more will come as a surprise to you. By keeping track of your expenses for various services and figuring out viable uses for them, you can anticipate problems before they arise.

#3. Track your profit every once in a while

Many eCommerce business owners approach their duty of measuring profits in a "set and forget" manner. And you might be one of them! No matter how much the business changes, you may just choose the lazy strategy of staying with the same profit analysis findings.

Over time, this not only stops being practical but also causes you to misuse the old data for the current situation. In addition, you will struggle to reconcile your sales from a few weeks or possibly months ago when it comes time to file taxes.

Even while you can periodically catch up on your sales and profits, waiting until tax time to organize your books might cause a lot of problems for your Shopify store, including:

Not being aware of your daily (or at least weekly) cash flow, you are unable to make financially responsible decisions regarding the direction your business should take.
You will be unable to invest your resources in your inventory properly.
Your business will run out of money, and you might not be able to pay your employees, suppliers, or even yourself.

Therefore, as your operations change, you will need to start your calculation again. In other words, you should do that on a daily basis.

An up-to-date profit analysis offers a current picture of how your business performed the previous month. That, in turn, gives you useful and actionable information for making informed decisions. Nevertheless, you will be making decisions based on inaccurate data if profit analysis is not closed at least once a month.

Overall, while it might not be your favorite aspect of running a business, keeping your profitability information up-to-date is crucial for yearly growth and running a successful Shopify store.

#4. Focus on metrics that don’t matter

It is easy to overlook the metrics that are most important in data-rich environments like the eCommerce world. Thus, you should decide on the metrics that you can use to improve your profitability before calculating profit.

The metrics you should be paying attention to are those that may be used to increase profitability. These actionable metrics are:

Conversion rate: The proportion of visitors to your online store who make a purchase This metric will gauge how well you are doing at turning leads into new customers.
Customer Acquisition Cost (CAC): The average cost to gain a customer. It will tell you if you are effectively acquiring new customers or if you are just wasting money on some marketing channels that should be shut down later.
Average Order Value (AOV): The average amount per cart order that your customers pay. Understanding this metric is important when talking about how to evaluate the effectiveness of marketing campaigns. Moreover, it can help with goal-setting and income prediction for prospective customers.
Customer Lifetime Value (CLV): The total amount of money each customer of your business is expected to spend with you during their lifetime. The CLV metric provides insight into your business's long-term financial health. Besides, high CLV reflects repurchase intent, product-market fit, and recurring revenue from loyal customers.

Generally speaking, they are metrics with a target, much like your profit. You can end up measuring too many things if you don't focus on them.

Overall, you should try to avoid focusing on metrics that are not helpful for understanding your profitability. Your company ultimately loses money as a result of inaccurate metrics tracking, which also makes it more difficult to prepare financially for the upcoming month or later in the future.

#5. Waste too much time calculating profit

Needless to say, tracking and calculating profit for your Shopify store is a must. However, don’t just be obsessed with that as you may be wasting your time!

That sounds strange, but it is pretty true that you are focusing on calculating your profit but forgetting to act on generating it.

Besides, calculating and managing your profit is just a small part of a huge business operation, in which you have to handle many other things, such as store and product development, marketing, customer service, etc.

That is why it is always the best idea to avoid any mistake that could happen to your Shopify profit calculation and affect the results, as you will not have time to do that again and again.

If you find yourself making one of the mistakes we've just discussed, it is time to take action. If your daily work and responsibilities keep you busy, you might want to look for reliable tracking and analyzing tools.

These tools will help you obtain the accurate, detailed, and up-to-date profit information you need for better business decisions within just a few clicks.

Get Rid Of All The Mistakes With TrueProfit

As we have mentioned above, you can prevent yourself from struggling with any avoidable mistakes when calculating your Shopify profit if you have a tool in place. In fact, there are many tools out there that can meet all of your requirements and even more. Yet, we proudly say that our TrueProfit is the one that can bring you joy in a hard time tracking and computing your profits.

TrueProfit seamlessly integrates with all your major ad channels, shipping platforms, payment gateways, and any marketing platform. This allows us to sync numbers from all data points, giving you your exact, real-time profit analytics without any inaccuracy or delay.

With a one-time setup, you can forever gain access to:

Real-time profits and losses analytics
Detailed product analytics of every SKU, items that are most frequently bought together
Comprehensive customer profitability analytics like Customer Lifetime Value, Customer Acquisition Cost, LTV:CAC ratio, etc.
Aggregated view of multiple Shopify stores in one central hub
Advanced COGS, shipping costs, as well as custom expenses. For example, you can set custom affiliate spending at 10% of the revenue of the product sold.

Frequently Asked Questions

What is a good profit margin for Shopify stores?

A Shopify eCommerce store should have a profit margin of roughly 40%. It depends on a number of variables, including the type and nature of the business as well as the level of competition.

The average profit margin for small eCommerce stores is 30%, whereas it is 37% for larger companies.

How does Shopify calculate profit?

For your information, Shopify only provides you with a report of gross profit and gross profit margin. So, here is how it calculates these metrics:

The gross profit margin is calculated as ([net sales - cost] / net sales) x 100
The gross profit is calculated as (net sales - costs)

If you want to know about your net profit and other types of profit, you have to find a third-party app for tracking and analyzing the eCommerce metrics of your Shopify store.

How do I increase my profit margin on Shopify?

There are many tips to increase your profit margin on Shopify you can try. Here are some of the most useful ways:

Tracking expenses and profits closely, so you can figure out the areas that need improvement
Raising your Average Order Value with cross-selling or upselling
Lowering costs such as COGS, Shipping costs, etc.
Optimizing Return On Ad Spend (ROAS) by allocating your time and resources to the optimally performing marketing campaigns
Concentrating on your most profitable products and customers

Wrapping Up!

All in all, we have just shown you the 5 most common mistakes that any Shopify merchant would make when calculating their profits. That means you could be one of them. Yet, when you know your mistakes, you have no choice but to act on them!

Moreover, it is no lie that when you calculate profit for your Shopify store on your own, a lot can go wrong. That is why a profit tracking and real-time analytics app like TrueProfit is a must. It not only makes the process simpler but also guarantees 100 percent accuracy.

With all the correct and up-to-date data in hand, you can be confident when making financially sound business decisions that appropriately utilize your resources for the maximum development and profit of your Shopify store.

Discover what proper profit-tracking looks like at trueprofit.io

Irene Leander

Irene Leander is the Content Manager at TrueProfit. With over 5 years of experience in content creation and editorial writing for the eCommerce industry, she aspires to bring stellar value to eCommerce merchants with over-the-top articles.