Running a successful eCommerce business on Shopify involves more than just setting up an attractive storefront. To ensure profitability and sustainable growth, merchants must focus on key financial metrics: GM1, GM2, and GM3.
Understanding these metrics is crucial for analysing performance and making informed business decisions. Let’s explore why these metrics are important and how Ellis’ features can help merchants optimise their eCommerce operations.
Understanding GM1, GM2, and GM3
GM1 (Gross Margin 1) or Product Gross Margin (GM1):
GM1, Gross Margin 1, or Product Gross Margin represents the basic profitability of a business before considering any indirect costs. It is calculated as:
GM1 =Net Sales -Cost of Goods Sold (COGS)
GM1 provides insights into how effectively a company is producing and selling its products. A high GM1 indicates efficient production and strong product pricing strategies.
GM2 (Gross Margin 2) or Operating Gross Margin (GM2):
GM2 takes the analysis a step further by incorporating direct selling expenses such as marketing and sales personnel costs. It is calculated as:
GM2 = GM1 - Direct Selling Expenses
This metric helps businesses understand the impact of their direct selling efforts on profitability.
GM3 (Gross Margin 3) or Net Profit Margin (GM3):
GM3 includes all operational expenses, interest, taxes, depreciation, and amortisations offering a comprehensive view of the company’s profitability. It is calculated as:
GM3 = GM2 - All Expenses
GM3 is essential for evaluating overall business efficiency and determining the net profitability after all direct and indirect costs.
Why These Metrics Matter in eCommerce
Understanding the true profit margins of your eCommerce business is crucial, yet many merchants with a retail background often overlook this aspect. It’s essential to account for all expenses, including shipment costs, returns, refunds, handling costs, and discounts, when pricing products and evaluating business health.
Understanding GM1, GM2, and GM3 helps Shopify merchants with
- Marketing Resource Allocation: Analysing GM2 allows for more strategic allocation of marketing and operational resources. Merchants can focus their investments on the most profitable channels and strategies, optimizing marketing efforts and enhancing overall business efficiency.
- Profitability Analysis: These metrics provide a comprehensive view of overall profitability in addition to product profitability, enabling merchants to make decisions about scaling their business, launching new products, or entering new markets. By having a clear understanding of profitability at different levels for growth and expansion.
- Shipment Cost Analysis: Incorporating shipment cost analysis at the country or order level offers valuable insights into setting free shipment thresholds and pricing shipment costs. Understanding the impact of shipping costs on overall profitability can lead to better pricing strategies.
By using GM1, GM2 and GM3, Shopify merchants can achieve a deeper understanding of their financial health and make strategic decisions that foster growth and efficiency. These metrics also complement Customer Lifetime Value analysis and overall customer profitability in different segments.
Leveraging Ellis’ Features on Shopify
Ellis provides powerful tools to help Shopify merchants optimise financial metrics and enhance business performance.
Here’s how Ellis can enhance your eCommerce performance on Shopify:
- Detailed Income Statements: Ellis breaks down GM1, GM2, and GM3 in detailed income statements, providing a clear view of financial health for informed decision-making for all Shopify stores. Perform automatic profit and loss analysis across multiple Shopify stores, covering e.g. sales, returns, gift cards, marketing channel costs, shipment costs and additional expenses.
- Accurate Cost Tracking: Track all direct and indirect expenses accurately with Ellis, ensuring healthy profit margins and identifying cost-saving opportunities.
- Detailed Shipment Costs Analysis: Enhance gross margin analysis by understanding shipment costs by set/import shipment costs by order and country. This helps to detect anomalies, and unprofitable products.
- Refund Reasons Analysis: Ellis utilises generative AI to classify refunded products, understanding refund reasons by category, product, or courier to reduce future refunds, and improve future profits.
- Product Margins Analysis: Analyse product performance with accurate profitability data Identify most profitable products, with conversion rates and total profit per product views. This helps to optimise marketing spend.
By leveraging these features, Shopify merchants can achieve a deeper understanding of their financial health, optimise strategies, and improve profitability.
Conclusion
Understanding and analysing GM1, GM2, and GM3 is essential for any Shopify merchant aiming for sustained growth and profitability. These metrics provide critical insights into cost management, pricing strategies, resource allocation, and overall profitability. By leveraging the advanced features of Ellis, merchants can optimise their financial performance, ensuring a competitive edge in eCommerce.