The 30% Rule: What is a "Healthy" Profit Margin in E-commerce?
"I made $100,000 in sales!"
That sentence means nothing. You can sell $100k and lose money. The only metric that pays your rent is Net Profit.
New sellers often ask: "Is a 10% margin good?" The honest answer is: It depends on your model, but it's risky.
In this guide, we will break down the industry benchmarks for 2025, explain the "Rule of 3" for product pricing, and show you why "Gross Margin" is a vanity metric if you don't account for advertising.
The "Rule of 3" (Pricing Heuristic)
For a sustainable Private Label product, your selling price should roughly follow the 1/3 Rule.
- 1/3 Product Cost (Landed): This is the money you pay to your supplier and freight forwarder. Ideally, this should be 25-30% of the sale price.
- 1/3 Fees & Ads: This goes to Amazon (Referral + FBA fees) or Shopify (Payment fees) plus your Ad Spend (PPC/Facebook).
- 1/3 Net Profit: This is the money you keep. Ideally 30-35% before overheads.
The Warning: If your Landed Cost is 50% of the sale price, you only have 50% left for fees, ads, and profit. Since Amazon fees are usually 30-35% (including FBA), you are left with 15% for Ads and Profit. That is a recipe for failure.
Benchmarks by Business Model (2025 Data)
A "Healthy" margin is different for a dropshipper vs. a brand owner. Here are the targets you should aim for:
| Business Model | Gross Margin Target | Net Profit Target |
|---|---|---|
| Dropshipping | 40% - 60% | 10% - 15% |
| Wholesale | 25% - 35% | 15% - 20% |
| Private Label (FBA) | 60% - 70% | 20% - 30% |
| Handmade / Luxury | 70% - 85% | 30% - 50% |
Why Dropshipping Net Profit is So Low
Dropshippers often mark up the product by 3x (High Gross Margin), but they have extremely high Customer Acquisition Costs (CAC). Since they don't have brand loyalty, they have to pay for every single visitor via Facebook/TikTok ads. This eats 30-40% of the revenue.
Why Wholesale is Lower Risk
Wholesalers selling Nike or Sony have lower gross margins because they can't mark up the price freely (MSRP limits). However, their Net Profit is stable because they spend almost $0 on ads. The brand (Nike) has already done the marketing.
The Impact of TACoS (Total Advertising Cost of Sales)
This is the most important metric for FBA sellers.
Formula: (Total Ad Spend / Total Revenue) x 100
If you sell $10,000 total (organic + ads) and spent $1,500 on ads, your TACoS is 15%.
- TACoS < 10%: Very healthy profitable business.
- TACoS 10-15%: Healthy growth phase.
- TACoS > 25%: Warning zone. You are overspending to buy sales.
When calculating your margin, always subtract 15% for TACoS. If your Gross Margin is only 20%, and you subtract 15% for ads, you have 5% left. That is not enough to cover returns.
How to Improve Your Margin
If your analysis shows you are below the healthy zone, you have three levers:
- Raise Price: The fastest way to add margin. Increasing price by $1 adds $1 directly to the bottom line. (See our Guide to Raising Prices).
- Lower COGS: Negotiate with suppliers for larger MOQs or cheaper packaging. Saving $0.50 per unit adds up massively over a year.
- Increase AOV (Bundle): Shipping two items in one box saves FBA fees. This increases your margin per order. (See our Bundling Strategy).
FAQ
Is 50% profit possible?
Yes, but usually only with unique, patented products or strong brands (like Apple or luxury fashion). For generic commodities on Amazon, competition usually drives net profit down to 15-20%.
Should I accept lower margins to launch?
Yes. During a "Launch Phase" (first 3 months), it is normal to have 0% or even negative net profit because you are spending aggressively on PPC to rank. This is an investment, not a loss. But you must have a plan to reach 20% profitability once ranked.
Does "Net Profit" include my salary?
Technically, no. Net Profit is what the business keeps. If you pay yourself a salary, that is an expense (overhead). If you just take "draws" from the profit, then your Net Profit needs to be high enough to support your lifestyle.
Conclusion
Revenue is vanity. Profit is sanity. Cash is reality.
Don't run your business hoping for the best. Run the numbers before you launch. If the spreadsheet doesn't show a 30% gross margin potential, do not wire the money to China.
Action Step: Open the calculator. Input your Product Cost, Shipping, Fees, and an estimated 15% for Ads. What is the number at the bottom? If it's red, stop.