Mistakes to Avoid When Calculating Profit for Your Shopify Store in 2021

Mistakes to Avoid When Calculating Profit for Your Shopify Store in 2021
Reading Time: 6 minutes(Last Updated On: December 31, 2020)

How you track and calculate profit can make or break your Shopify store. The problem is it’s so easy to make mistakes, making your profit calculation inaccurate, and misrepresenting the true state of your Shopify store.

With so many factors to take into account, it’s no wonder mistakes happen frequently when calculating profit.

‘Mistakes can happen and frequently do to people as brainy and footsy as you.’

– Dr Seuss

But with mistakes come big risks, particularly when it comes to getting e-commerce profits wrong. By basing your strategy on incorrect profit calculations, you could be channeling your resources into the wrong areas, spending more than you’re earning, and putting your business into a precarious financial situation.

Identify and avoid the five most common (and less common but equally damaging) mistakes by reading this profit guide.

 

1. Wrong approach to calculate profit 

Calculating profit may be a straightforward formula:

Profit = Revenue – Expenses

Or, according to Neil Patel:

Profit = Demand X (Revenue – Expenses)

Whichever formula you use to calculate profit, there’s a whole lot more than meets the eye, other than simple mathematics. 

If just one of these factors is off the mark, it can have disastrous consequences for your business. 

Tips to avoid this mistake

To make it easier for you, you can use an automated Shopify profit calculator, such as the BeProfit – Profit Tracker, which collects every data point that affects your profitability including:

  • Operating costs
  • COGs (Cost of Goods Sold)
  • Taxes
  • Returns
  • Exchange rates
  • Marketing, shipping, and other expenses

Unlike a simple GP calculator (Gross Profit), BeProfit calculates, tracks and reports both gross and net profit, taking every factor into account. It also minimizes errors by automating the whole process and presenting all the data in a visually intuitive dashboard, making it easy to make data-driven decisions.

 

2. Mistaking income for profit 

Big sales and income can be misleading. Let’s say your store sells a huge quantity of products. Sure the money is rolling in, but how much is going out? In other words, how much money have you actually made after expenses, how much profit?

Imagine you have a Shopify store that sells custom-made fabric masks. You sell each mask at $15 apiece. Your masks are a hit, and you manage to sell 1,000 masks in your first month. That’s income of $15,000! Seems like you have a winner, so you continue on this path, without adjusting any aspects of your business model.

The problem is it’s easy to get distracted by the money rolling in and you forget to calculate profit. 

After a few months, you come to realize that you have a cash-flow problem. Of this $15,000 monthly income, how much has it cost you to earn that? Once you’ve subtracted all your set-up and operating costs, you come out with a zero to negative profit margin. Turns out making and customizing masks is costly! Nevermind the shipping fees, payment processing fees, and taxes, to name a few.

Where did you go wrong? Ideally, you should calculate profit from the outset but it’s never too late to dive in deeper and see how you can make that income translate into better profits. 

Tips to avoid this mistake

Become a profit-focused business owner, always tracking business metrics, with the goal of optimizing profits being top-of-mind. Use data to help you make data-driven decisions that will help you achieve this profitability goal.

 

3. Underestimating/not tracking all expenses

Underestimating expenses is bound to lead to an incorrect profit calculation. With so many obvious and less obvious costs that occur, it’s no wonder that some manage to slip through the cracks. These are some of the most common expenses that online sellers neglect or forget to track:

Returns & Refunds – free returns or exchanges is the second top reason why consumers shop online, topped only by free shipping. As much as 62% of consumers claim that they would buy again from a seller that offers free returns. It’s important to display your free returns policy prominently on your website, product pages, and online ads. 

While there’s no getting away from the fact that free returns should be an important part of your Shopify store, they can also chew up a big chunk of your profits. If you do offer free returns, there are a couple of costs that you’ll incur – the cost of actually paying for the return shipping, refunding the customer, plus the costs to process the item back into your store and possible disposal of the item.

The return rate for e-commerce stores is high, double that of brick-and-mortar stores (20% vs 8-10%), so unless you factor it into your pricing, it can be a real risk to your store’s profitability.

Payment processing fees online sellers need to accept payment processing fees as a given – there’s no way around them. Although not large on their own, these fees can add up and eat into your profit margin. There are bank fees, credit card fees, and even the payment processor’s fees – everyone wants their piece of the profits.

One of the biggest mistakes Shopify store owners make when they calculate profit is to forget about these small yet cumulative costs.

Tips to avoid this mistake

  1. Use a Shopify profit calculator that automatically takes returns and payment processing fees into account
  2. Minimize returns by offering a long return window (consumers tend to forget to return if they have a long return window)
  3. Add more product details, videos and reviews to your site to set accurate customer expectations
  4. Understand your processing fees up-front so that you can factor them into your profit margin

4. Underpricing or significantly overpricing your products

Setting your prices is a delicate balance – on the one hand, you want to sell more products, while on the other hand, you need to preserve the profit margins that you need to run a sustainable, profitable Shopify store. 

Just like Goldilocks, you’re going to want the pricing strategy that’s just right for your business.

Calculate profit

Underpricing – many online sellers make the mistake of trying to underprice the competition to gain market share. This can actually be a double-edged sword – low prices mean a thin profit margin, and could even ironically deter customers as they may view your products as inferior in quality. Furthermore, because your profit margins are so narrow, you’ll need to sell large quantities to become profitable.

Overpricing – setting your price too high can scare customers away unless your premium price is based on real additional value.  

Tips to avoid this mistake

Getting your pricing just right – try to find the perfect price point for your target market by researching the market, your competition, and your ideal customers, and also looking at your business model. Don’t compete on price, compete on value – your research will help you reveal what your customers will be willing to pay for the value you offer.

Analyze profit trends – tracking your business metrics over a period of time will help you determine what you should adjust to optimize your profits, and will help you see if you have wiggle room to adjust prices.

5. Failing to utilize tools or services 

In the hopes of minimizing costs, online sellers could make one of the biggest mistakes of all – neglecting to invest in a tool/service that could actually save money and increase profits in the long-run. Even if you’re profitable right now, it’s crucial to keep tracking your profits on an ongoing basis to make sure you remain profitable and don’t experience any profit drains.

One of the most important tools that a Shopify seller absolutely needs to have is a Shopify profit calculator, which is an analytics tool that helps store owners track expenses and optimize their profitability.

Tips to avoid this mistake

There’s no reason to shy away from investing in such a tool as you can easily find one in the Shopify app store, either at zero or minimal cost.

BeProfit – Profit Tracker is Shopify’s most accurate profit margin calculator that is available for free download in the Shopify app store. 

 

Once is a mistake, twice is a choice

Mistakes happen to the best of us. Luckily many mistakes can be rectified, even if it seems like all hope is lost. But when it comes to profitability, we skate on thin ice so while once is a mistake, twice is a choice, one that could sink your store. Follow the above-mentioned steps to avoid making these mistakes and make your Shopify store as profitable as it can be!

Calculate profit with BeProfit - Profit Tracker

Disclaimer: The information contained in this article is provided for informational purposes only, should not be construed as legal advice on any subject matter and should not be relied upon as such. The author accepts no responsibility for any consequences whatsoever arising from the use of such information.