For stable operation of an ecommerce site, it is important to know both the volume of sales and profit margins. While profit margins are an important indicator, they can vary significantly depending on the industry and business model. This can make it difficult to identify clear targets or benchmarks.

In this article, we outline target profit margins for Japanese ecommerce sites and how to calculate them. We also explain their relationship to costs and key points for improvement.

What’s in this article?

• Target profit margins for Japanese ecommerce sites
  
• Survey of profit margins for Japanese ecommerce
  
• How to calculate profit margins for Japanese ecommerce sites
  
• Why is it important to know an ecommerce site’s profit margin?
  
• Operating costs that impact ecommerce profit margins
  
• How to increase profit margins in ecommerce
  
• Products on ecommerce sites with high profit margins
  
• How Stripe Checkout can help
  

Target profit margins for Japanese ecommerce sites

The profit margin of an ecommerce site varies depending on its products, pricing, customer acquisition methods, and logistics structure. When considering target profit, businesses often use the 3-3-4 rule and the 1-5-4 rule.

These rules were originally used for calculating profit margins in Japan’s mail-order sales industry. Regardless of the method used, the ultimate goal is to secure an operating profit margin of around 20%.

The 3-3-4 rule

If sales are set at 100, the 3-3-4 rule assumes the following distribution:

• Product costs: 30%
  
• Promotional expenses: 30%
  
• Other expenses plus profit: 40%
  

The 3-3-4 rule assumes a relatively stable profit structure that emphasizes a balance among the cost of goods sold, promotional expenses, and other overhead costs. It can be applied to many ecommerce site operations.

The 1-5-4 rule

The 1-5-4 rule has the following distribution:

• Product costs: 10%
  
• Promotional expenses: 50%
  
• Other expenses plus profit: 40%
  

The profit structure of the 1-5-4 rule relies on significant investment in advertising and promotion. This approach is well-suited for ecommerce sites that focus on selling high-priced, high-margin products.

Survey of profit margins for Japanese ecommerce

What profit margins are Japanese ecommerce businesses currently achieving? The Status of Users of Major Comprehensive Ecommerce Sites survey conducted in 2021 by the Distribution Economics Institute of Japan reviewed 114 ecommerce companies that used major ecommerce sites such as Rakuten, Amazon, and Yahoo! Shopping. Understanding the average operating profit margin and sales growth rate of ecommerce sites can provide a basis for considering target profit margins for product-based ecommerce.

Distribution of operating profit margins in ecommerce businesses

In 2021, the operating profit margins for ecommerce businesses at net settlement were as follows:

While more than half of the businesses secured some level of profit, it is also clear that a significant number operated at a loss.

Status of sales growth rate

The sales growth rate of ecommerce businesses in 2021 compared to three years prior is shown below:

While approximately half of all businesses increased their sales, over 20% experienced a decline. This indicates significant disparities in the growth of ecommerce businesses.

How to calculate profit margins for Japanese ecommerce sites

In ecommerce site operations, there are two types of profitability metrics. Gross profit margin measures profitability at the product level, and operating profit margin assesses the overall profitability of the business.

Gross profit margin

Gross profit margin shows the percentage of gross profit relative to total sales revenue. It is calculated by subtracting the cost of goods sold from sales revenue. On ecommerce sites, gross profit margin is used to assess the profitability of the products themselves.

Gross profit margin is calculated using the following formula:

Gross Profit Margin = (Sales Revenue – Cost of Goods Sold) ÷ Sales Revenue x 100

Here is an example: A product has a selling price of ¥1,000,000 and a cost of ¥600,000. Here is the gross profit margin:

(¥1,000,000 – ¥600,000) ÷ ¥1,000,000 x 100 = 40%

In this case, the gross profit margin is 40% of the sales amount.

Operating profit margin

The operating profit margin indicates the percentage of sales remaining after deducting the cost of goods sold and various operating costs. This is used to determine the overall profitability of an ecommerce business.

Operating profit margin can be calculated using this formula:

Operating Profit Margin = (Sales Revenue – Cost of Goods Sold – Selling, General, and Administrative Expenses) ÷ Sales Revenue x 100

Here is an example: A product has a selling price of ¥1,000,000, a cost of ¥600,000, and various other expenses totaling ¥200,000. Here is the operating profit margin:

(¥1,000,000 – ¥600,000 – ¥200,000) ÷ ¥1,000,000 x 100 = 20%

In this case, the operating profit margin is 20%.

Why is it important to know an ecommerce site’s profit margin?

Profit margin is an indicator used to assess how efficiently an ecommerce site generates profits. Even if sales increase, profits might not be as substantial as expected when costs such as advertising fees, shipping, and commissions rise too much. To accurately assess the state of a business, regularly check sales and profit margins.

Operating costs that impact ecommerce profit margins

The profit margin of an ecommerce site is significantly influenced by the scale of sales, types of costs, and their amounts. To increase profit margins, it is important to understand the breakdown of operating costs in addition to sales revenue.

The costs that most significantly impact profit margins when operating an ecommerce site can be split into development costs and operating costs.

Development costs

These are the costs incurred when creating the ecommerce site or when adding or upgrading features. It is important to note that these costs are not just initial expenses. Instead, they periodically arise during operation for improvements and other purposes.

Development costs include the following:

• Initial setup costs for creating an online store
  
• Creation of designs
  
• Outsourcing fees to external production companies and engineers
  

Operating costs

Operating costs are incurred continuously during the day-to-day operation of an ecommerce site. They tend to fluctuate with sales growth and directly and significantly impact profit margins.

Operating costs include the following:

• Advertising and promotion
  
• Shipping and packaging
  
• Payment processing fees and fraud protection
  
• Labor
  
• Usage fees for the ecommerce platform and various other systems
  
• Inventory management
  
• Product photography and content production
  

How to increase profit margins in ecommerce

To increase the profit margin of an ecommerce site, it is important to boost sales and review the cost structure and product mix.

Review pricing

To improve profit margins, it is first necessary to verify that pricing is appropriate. If prices do not reflect costs and operating expenses, profits will naturally be difficult to achieve.

Refine advertising and promotion costs

While advertising and promotional expenses are important for expanding sales, their use can significantly reduce profit margins. Regularly review these expenses to ensure they achieve good results and to avoid unnecessary spending.

Lower costs for shipping and returns

Shipping costs and return processing fees can seem small per transaction. However, as the number of transactions increases, the impact of these costs grows significantly. Reviewing delivery conditions and operational methods can help reduce the burden of these costs.

Confirm payment processing costs

The costs associated with payment processing occur with every transaction. As sales increase, these costs also increase, which can impact profit margins. Therefore, when using a payment agent, it is important to verify the payment agent fees and ensure that the entire payment system operates efficiently.

Using Stripe Checkout allows businesses to efficiently manage payments with multiple clients. A wide range of functions—including revenue distribution, fee collection, and international transactions—are also available.

Improve inventory management

Inventory management is one factor that directly impacts profit margins. Excess inventory leads to costs such as storage fees, markdowns, and disposal.

Focus on a product lineup with high profit margins

To increase profit margins, it is important to control costs and focus sales on high-margin products. The cost of goods and operating expenses are different for each product, so it is important to identify which items contribute to profits.

Products on ecommerce sites with high profit margins

One key point for increasing the profit margin of an ecommerce site is to handle products known to have relatively high profit margins. Below, we discuss the types of products that tend to have higher profit margins.

Digital products

Digital products—such as online courses and video content—can achieve high profit margins because there are no costs for inventory or shipping. While periodic updates might be needed after creation, businesses can generally sell digital products without additional costs.

Private brand (PB) products

PB products are original items developed and sold by retailers. This allows businesses to control everything about the products, from planning to pricing. With PB products, it is easier to set profit margins because these products are less likely to be involved in price competitions. This makes it easier to reflect brand value and uniqueness in pricing.

Bundles and sets

When selling sets or bundles, it becomes easier to increase the unit price for each purchase. This creates improved profit margins. Even when it is difficult to generate profit from a single item, bundling products or offering exclusivity or special benefits can help improve customer satisfaction with prices.

Additionally, selling items together in a single order allows businesses to distribute the costs associated with shipping and payment processing. As a result, it is easier to increase the profit margin relative to sales.

How Stripe Checkout can help

Stripe Checkout is a fully customizable prebuilt payment form that makes it easy for you to accept payments on your website or application.

Checkout can help you:

• Increase conversion: Checkout’s mobile-optimized design and one-click checkout flow make it simple for customers to input and reuse their payment information.

• Reduce development time: Embed Checkout directly into your site, or direct customers to a Stripe-hosted page, with just a few lines of code.

• Improve security: Checkout handles sensitive card data, simplifying PCI compliance.

• Expand globally: Localize pricing in 100+ currencies with Adaptive Pricing, which supports 30+ languages and dynamically displays the payment methods most likely to improve conversion.

• Use advanced features: Integrate Checkout with other Stripe products, such as Billing for subscriptions, Radar for fraud prevention, and more.

• Maintain control: Fully customize the checkout experience, including saving payment methods and setting up post-purchase actions.

Learn more about how Checkout can optimize your payment flow, or get started today.