The sentence anyone working with online stores hears most: “Sales are great, but I don’t know where the money goes.” A product is bought for SAR 50 and sold for 100, so profit looks like 50. Then come VAT, shipping, packaging, platform commission, payment-gateway fees, ad cost per order and returns. Suddenly the real profit is SAR 10 — or below zero.
This guide explains how to calculate your real profit margin per product, and how to price a new product starting from the margin you need — not from a competitor’s price alone, and not from guesswork.
Margin vs. markup: two terms people confuse
Markup is the percentage added on top of cost. Margin is profit as a percentage of the selling price. A product costing 50 and selling for 100:
- Markup = (100 − 50) ÷ 50 = 100%
- Margin = (100 − 50) ÷ 100 = 50%
Mixing them up is expensive. Someone who says “I want a 40% margin” and then adds 40% to cost actually gets a 28.6% margin. The merchant thinks they make 40 of every 100; they make under 29.
| Markup on cost | Actual margin |
|---|---|
| 25% | 20% |
| 50% | 33.3% |
| 100% | 50% |
| 200% | 66.7% |
Financial decisions — ads, discounts, break-even — are built on margin, because every other cost is paid out of the selling price.
The costs that quietly eat profit
Simple gross margin (selling price minus product cost) misleads in e-commerce. These are the costs to deduct per order:
1. VAT
If your displayed price includes VAT, part of it isn’t yours. A product sold at SAR 115 including 15% earns you 100. Calculate everything on the pre-VAT price (divide by 1.15, as in our VAT calculation guide).
2. Shipping and packaging
Even when the customer pays shipping, you often absorb part of it — especially with “free shipping over X” offers. Add cartons, packaging, labels and any small gift you include.
3. Platform commission or subscription
Platforms differ: some take a percentage of each transaction, some charge a fixed monthly subscription, some both. Marketplaces usually charge considerably more. Spread a fixed subscription across your average monthly orders to see each order’s share.
4. Payment-gateway fees
Usually a percentage of the order value, sometimes plus a fixed amount per transaction, and varying by payment method. Cash-on-delivery orders carry their own cost at the courier.
5. Ad cost per order
If most orders come from paid ads, cost per acquisition (CPA) is part of the order’s cost — often the biggest after the product itself. This is where margin connects directly to ROAS and break-even.
6. Returns and refused orders
Returns mean double shipping and sometimes a product you can’t resell. If 8% of orders come back, that cost is spread across every order.
You don’t need a complex spreadsheet for this. Our profit margin calculator takes cost, shipping, commission, payment fees, VAT and ad spend and gives you net profit and margin per order — plus a suggested selling price for the margin you want.
A full example: a SAR 199 product
| Item | Amount (SAR) |
|---|---|
| Selling price incl. VAT | 199.00 |
| Selling price excl. VAT (÷ 1.15) | 173.04 |
| Product cost | −70.00 |
| Shipping and packaging borne by the store | −22.00 |
| Commission and payment fees (assume 4% of the amount paid) | −7.96 |
| Profit before ads | 73.08 (42% margin) |
| Ad cost per order | −45.00 |
| Net profit per order | 28.08 (16% margin) |
The figures are illustrative, but the pattern is real: a product that “makes SAR 129” on paper actually makes 28. A 15% discount on it would wipe out most of that profit, as our discount strategy guide shows.
How to price from the margin you want
Instead of starting with a price and hoping for profit, start with a target margin and work out the price:
Pre-VAT selling price = total variable costs ÷ (1 − target margin − percentage-of-price costs)
Percentage-of-price costs are those that scale with the price itself, such as commission and payment fees. Example: product and shipping cost SAR 92, commission and fees 4%, and you want a 35% margin after those costs:
92 ÷ (1 − 0.35 − 0.04) = 92 ÷ 0.61 = SAR 150.82 before VAT, or 173.44 including VAT. Then round to a sensible psychological price such as 175 or 179.
The calculator does this automatically in “price from margin” mode.
What margin is right for your store?
No single number fits every store. Margin depends on category, competition, order volume and how you acquire customers. These questions help:
- Does the margin cover ad cost? If your average CPA is SAR 50 and profit before ads is 40, every ad-driven order loses money.
- Does it leave room for discounts? Stores that rely on seasons (White Friday, Ramadan) need a margin that survives markdowns.
- Does it cover fixed costs? Salaries, rent and subscriptions come out of total profit, so work out how many orders a month you need to cover them.
Ways to raise margin without raising prices
- Raise average order value: bundles, complementary products, and a free-shipping threshold that makes shipping a smaller share of the order.
- Negotiate with suppliers on volume or payment terms.
- Review shipping rates, compare couriers and carton sizes (volumetric weight raises costs quietly).
- Reduce returns with clearer photos, accurate size charts and a clear return policy.
- Improve conversion rate so ad cost per order falls.
From profit per order to profit per month
Profit per order is half the picture. The other half is fixed costs that don’t change with order volume: salaries, rent, platform and app subscriptions, design and marketing tools. To know whether your store truly makes money, calculate:
Orders needed per month = monthly fixed costs ÷ net profit per order
Back to the earlier example: net profit per order is SAR 28.08. If your fixed costs are SAR 12,000 a month, you need about 428 orders a month just to cover them — more than 14 orders a day before real profit begins.
That number changes how you think about everyday decisions:
- Raising net profit per order by just SAR 5 (by negotiating shipping or raising order value) cuts the orders needed to about 363.
- Lowering ad cost per order by SAR 10 cuts it to about 315.
- A permanent SAR 10 discount pushes it above 660.
So review profit per order on your best-sellers first, because they carry most of your fixed costs.
Frequently asked questions
Should I calculate margin on the VAT-inclusive price?
No. VAT isn’t your income, so always calculate margin on the pre-VAT price — otherwise you’ll overestimate profit.
Is it better to price based on competitors?
A competitor’s price is a useful reference for the market ceiling, but it doesn’t know your costs. First work out the price that hits your margin, then compare it with the market. If it’s much higher, look for cost reductions or value that justifies the gap.
How often should I review pricing?
Whenever supplier, shipping or commission costs change, before any sale season, and periodically every few months.
Good pricing isn’t a number you pick once — it’s an equation you revisit whenever costs change. Calculate your real profit now with our free profit margin calculator — and if you’re building a store or want your pricing and ads reviewed together, get in touch.
