You sold 40 candles last month at $28 each. That's $1,120. Feels pretty good until you add up the wax, wicks, fragrance oils, jars, labels, and shipping supplies. Then subtract your Etsy fees, website hosting, and the gas you spent driving to the post office. How much did you actually keep?
That number — what you keep as a percentage of what you brought in — is your profit margin. It's the most useful number in your business because it tells you whether your pricing, costs, and volume are actually working together.
Gross Profit Margin: The First Number to Know
Gross profit margin tells you how much money you keep after covering the direct cost of making your product. It ignores overhead (rent, software, insurance) and focuses purely on price vs. production cost.
The formula:
Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue x 100
Cost of Goods Sold (COGS) includes everything that goes directly into making the product: raw materials, packaging, labels, and labor tied to production.
Example: Soy Candles
You sell hand-poured soy candles for $28 each. Each candle costs:
- Soy wax: $2.80
- Fragrance oil: $1.50
- Wick: $0.30
- Glass jar: $2.00
- Label: $0.40
- Box and tissue paper: $1.00
Total COGS per candle: $8.00
Gross profit per candle: $28.00 - $8.00 = $20.00
Gross profit margin: $20.00 / $28.00 x 100 = 71.4%
For every dollar in revenue, you keep about 71 cents after materials. But that's not the whole picture.
Net Profit Margin: The Real Bottom Line
Net profit margin is what's left after all expenses — materials plus everything it takes to run the business.
Net Profit Margin = (Revenue - All Expenses) / Revenue x 100
The Full Picture for Those Candles
You sold 40 candles at $28 each. Revenue: $1,120.
Direct costs (COGS): 40 x $8.00 = $320
Monthly overhead:
- Etsy fees (listing, transaction, processing): $112
- Shipping supplies and postage: $160
- Equipment (amortized monthly): $25
- Website hosting: $15
- Instagram ads: $50
- Electricity for melting wax: $20
Total overhead: $382
Total expenses: $320 + $382 = $702
Net profit: $1,120 - $702 = $418
Net profit margin: $418 / $1,120 x 100 = 37.3%
A big drop from 71%, and completely normal. Gross margin tells you if your pricing covers materials. Net margin tells you if the business is actually making money.
Second Example: Baked Goods
You sell artisan cookies — $18 for a box of 12.
COGS per box:
- Butter, flour, sugar, eggs, chocolate: $3.50
- Packaging: $1.80
- Label and ribbon: $0.70
Total COGS: $6.00. Gross margin: $12.00 / $18.00 x 100 = 66.7%
You sold 60 boxes last month. Revenue: $1,080. Total COGS: $360.
Monthly overhead:
- Commercial kitchen rental: $200
- Delivery gas: $65
- Square processing fees: $32
- Promoted posts: $30
- Packaging supplier minimum: $45
Total overhead: $372. Total expenses: $732.
Net profit: $348. Net margin: 32.2%
Lower than candles — typical for food businesses where facility costs and perishability eat into margins.
What's a "Good" Margin?
It varies by product type. Rough benchmarks for small product businesses:
- Handmade goods (candles, jewelry, ceramics): 50-70% gross, 30-50% net. Materials are cheap relative to what people pay for handcrafted items.
- Food and baked goods: 50-65% gross, 25-40% net. Cheap ingredients but higher overhead from kitchen rental, permits, and delivery.
- Retail and resale: 30-50% gross, 15-30% net. You're marking up finished wholesale products, so gross margins are naturally thinner.
- Custom or made-to-order: 40-60% gross, 25-45% net. Higher prices offset the inability to batch-produce.
Below 20% net, your business works but isn't very efficient. Below 10%, you're essentially working for free once you account for your time. Above 40% net, you're doing very well.
Five Ways to Improve Your Margin
1. Raise Your Prices
The most effective lever and the one people resist most. Raising your candle price from $28 to $32 changes gross margin from 71% to 75%. On 40 candles, that's $160 extra per month with zero additional work. If you haven't raised prices in the last year, it's probably time.
2. Reduce Material Costs
Buy in bulk. That $2.80-per-candle wax might drop to $2.20 if you order a 50-pound case instead of 10-pound bags. Over 40 candles, that's $24 saved. Ask suppliers about volume discounts — many offer price breaks they do not advertise.
3. Cut Waste
Track how much material you throw away. Losing 10% of your wax to spills and bad batches is $32 a month in our candle example. Better measuring and consistent recipes reduce waste fast.
4. Reduce Platform Fees
Etsy charges roughly 10% per sale. Selling through your own website with a basic payment processor drops that to about 3%. On $1,120/month, that's $78 straight to your bottom line. You don't have to leave marketplaces entirely — just shift some sales to a direct channel.
5. Include All Costs in Your Pricing
This isn't improving your margin so much as stopping yourself from lying about it. Which brings us to...
Costs People Forget to Include
Your own labor. If you spend 2 hours making 10 candles and you'd pay someone $18/hour, your labor cost is $3.60 per candle. Without including it, your margin is artificially high.
Shipping you absorb. "Free shipping" doesn't make shipping free. Paying $5.50 to ship each candle without charging for it means $220 coming out of your profit on 40 orders.
Platform and processing fees. Credit card processing (2.9% + $0.30 per transaction), marketplace fees, monthly subscriptions. Real costs that reduce your real margin.
Returns and replacements. If 5% of orders result in a refund or replacement, that's $56 on $1,120 in revenue.
Run the Numbers Monthly
Calculating your margin isn't a one-time exercise. Do it every month — it takes 15 minutes once you have a system. When your margin slips, you'll catch it early. When a price increase or bulk purchase improves it, you'll see the impact immediately. Make pricing decisions based on math, not gut feeling. Your gut doesn't know what your Etsy fees cost. The spreadsheet does.