How to Calculate Net Revenue for E-commerce Businesses

For e-commerce business owners, understanding your financial performance is crucial in sustaining profitability and securing the survival of your business. One of the key metrics to understand and measure is net revenue. This figure provides a clear picture of the actual income your business generates after deducting various expenses and is essential for evaluating the overall health of your business.

Why Net Revenue is Important

Unlike gross revenue, which simply tallies up all sales including taxes, net revenue, represents sales after deducting specific expense line items. It is the amount of money your e-commerce business earns from selling products or services after accounting for taxes, cancellations, returns and discounts. Understanding your net revenue is important because it helps you:

• Evaluate Business Performance: Net revenue reflects the true earning power of your business and is a key indicator of financial health.
• Analyse profitability: Net revenue is used as the starting point for all gross, net and operating margin calculations.
• Manage Costs: By focusing on net revenue, you can identify areas where costs might be reduced, such as by minimizing returns or optimizing discount strategies.
• Plan for Growth: Accurate net revenue figures allow for better forecasting, helping you make informed decisions about inventory, marketing, and expansion.

How to Calculate Net Revenue

The formula for calculating net revenue is straightforward:

Net Revenue = Gross Revenue - Taxes - Cancellations - Returns - Discounts.

Let’s break it down:

• Gross Revenue: Top line revenue generated by your e-commerce sales before any deductions.
• Taxes: VAT included in the selling price of your products.
• Cancellations: Any canceled orders before fulfillment.
• Returns: The value of goods that customers return.
• Discounts: Any price reductions offered to customers, such as promotional discounts.

For example, if your gross revenue is $100,000, and you have 20% VAT $16,666, $5,000 in returns, $3,000 in discounts, and $2,000 in cancellations, your net revenue would be:

Net Revenue = $100,000 - $16,666 - $5,000 - $3,000 - $2,000 = $90,000

This $73,334 represents the true revenue your business has earned.

Using Net Revenue to Evaluate Profitability

Net revenue is not just a number to record—it’s a vital metric for evaluating your business’s profitability. Here’s how to use it:

Gross Margin: This is the difference between net revenue and the cost of goods sold (COGS). It shows how efficiently your business is producing and selling its products. The formula is:

Gross Margin = (Net Revenue - COGS) / Net Revenue

Contribution Margin: This metric lies in between gross margin and net margin by including all expenses associated with Cost of Sales. It can be calculated at product, channel or even brand level for businesses managing multiple verticals. It’s calculated as:

Contribution Margin = (Net Revenue - COGS - CoS) / Net Revenue

Operating Margin: This metric focuses on the profit generated from your core business operations, excluding non-operating income and expenses. It’s calculated as:

Operating Margin = Operating Income / Net Revenue

Net Margin: This is the percentage of net revenue that becomes profit after all expenses (including COGS, operating expenses, interest, and taxes) are deducted. It’s a crucial measure of overall profitability:

Net Margin = Net Income / Net Revenue

These metrics allow you to assess your business’s efficiency and profitability at various levels. For instance, if your gross margin is high but your net margin is low, it might indicate that your operating expenses are too high, prompting a closer look at your business’s cost structure.

E-commerce reporting

Most e-commerce platforms, such as Shopify, should provide accurate reporting on all of these metrics so there shouldn’t be much for you to do to get to the right numbers. With that being said, it’s surprisingly easy to overlook some of these line items, especially things like discounts which can be hidden within sales reports.

In our opinion, it’s good practice to separate all of these line items in your reporting to be sure that you have the correct net revenue figures to use in your other profitability equations.