How to calculate your true gross margin after fees, fulfilment, and overheads

Most SME owners have a gross margin number they quote with confidence. And most of those numbers are wrong — not because the maths is hard, but because the inputs miss costs that should be included.

This is a practical rebuild of the calculation from first principles, specifically written for UK SMEs with realistic costs for payment processing, fulfilment, freight, and the overheads that quietly eat margin.

Quick answer

True gross margin for UK SMEs is net revenue (after discounts, refunds, payment fees, marketplace commission, and VAT) minus fully-loaded cost of sale (supplier price, inbound freight, duty, packaging, fulfilment, outbound delivery, and returns allowance). A product that looks like 40% margin on selling price minus supplier invoice is often under 5% once all costs are properly included.

Start with the naive calculation — then see what is missing

Most SMEs calculate it like this:

The naive (incomplete) calculation

Gross Margin % = (Selling Price − Supplier Invoice) ÷ Selling Price × 100

If you buy at £60 and sell at £100, this gives 40%. That is the number most owners quote.

The problem is that £60 is not your real cost. And £100 is not always your net revenue. A rebuild from first principles looks more like this:

The real gross margin formula

The true calculation

True Gross Margin % = (Net Revenue − Fully Loaded Cost of Sale) ÷ Net Revenue × 100

Net revenue means after discounts, refunds, payment fees, and marketplace fees. Fully loaded cost of sale means every variable cost directly attributable to the unit sold.

What should be in "fully loaded cost of sale"

For a product business:

Supplier purchase price (in GBP, at the actual rate you paid)
Inbound freight — ocean, road, airfreight, courier
Duty and non-recoverable VAT
Customs clearance and inspection fees
Insurance on transit
Domestic delivery to your warehouse or store
Packaging — outer, inner, protective, labelling
Fulfilment labour and pick-pack (for ecommerce, usually per-unit)
Outbound delivery to customer
Allowance for returns — typical return rate × per-unit return processing cost
Allowance for shrinkage — theft, damage, write-off

For a service business:

Direct labour cost of the person delivering — hourly fully-loaded (salary + NI + pension + holiday)
Subcontractor cost if any element is delegated
Directly-billable expenses (travel, materials, licences used in delivery)
Software licences allocated per user or per project

What should be netted off revenue

Most SME owners compute margin on the gross selling price. They should compute it on net revenue received:

Discounts given at point of sale
Promotional rebates and coupons
Payment processor fees (Stripe, PayPal, card terminal) — typically 1.5-2.9%
Marketplace commission if sold via Amazon, Etsy, eBay, Notonthehighstreet etc.
VAT — always strip VAT from revenue before the calculation. VAT is never yours.

Worked example: UK ecommerce product

Same £100 selling price, £60 supplier cost. Let's rebuild:

Revenue side.
Selling price: £100 (inc VAT)
Net of VAT: £83.33
Less average 2% payment fee: £1.67
Less 12% Amazon commission (if applicable): £10.00
Net revenue retained: £71.66

Cost side.
Supplier invoice: £60.00
Freight + duty per unit: £3.50
Packaging per unit: £0.80
Pick-pack: £1.20
Outbound Royal Mail: £3.95
Returns allowance (4% return rate × £2.50 process): £0.10
Fully loaded cost: £69.55

True gross margin: (£71.66 − £69.55) ÷ £71.66 = 2.9%

The owner who thought this product was 40% margin is actually running it at under 3%. One bad return, one damaged unit, one shipping issue, and this product is a loss-maker. And there is nothing left to cover fixed costs — rent, staff, insurance, everything else.

What to do with the real number

Recalculating true gross margin is painful. It often reveals that parts of the business are not profitable at all. But the uncomfortable version is also the useful one. With the real number you can:

Decide which products to reprice — lines running below sector-average margin are priority
Decide which products to retire — if a line is structurally below contribution, more sales of it makes you poorer
Decide which sales channels are worth pursuing — a 40% headline margin Amazon sale can be a 3% real margin sale
Decide which customers are profitable — high-revenue low-margin customers are often unprofitable once cost-to-serve is added in
Set pricing correctly for new products — apply the true calculation before launch, not after

Common questions

Why do accountants and bookkeepers not show me this number?

Because statutory accounts compute gross margin in a specific, standardised way — and for compliance purposes it does not need to match commercial reality. Your accountant's gross profit figure includes supplier cost but usually does not break out freight, fulfilment, payment fees at the product level. The number you need for commercial decisions sits below what the accounts produce.

How often should I recalculate this?

At the product level, at least annually and after any major cost input change (supplier, fulfilment partner, sales channel, payment provider). At the business level, monthly — as a blended average — to track whether mix or pricing is drifting.

Does this include fixed overheads?

No. This is gross margin, which is net revenue minus direct variable costs. Fixed overheads (rent, admin salary, insurance) are covered by contribution above gross. If your true gross margin is too low to cover fixed overheads, that is a repricing or product-mix problem, not an overhead problem.

What is a healthy true gross margin for a UK SME?

Depends heavily on sector. Distribution often runs 18-28%. Ecommerce with own-brand product 25-45%. Services 40-70%. If your true figure is materially below sector median you either have a pricing problem, a cost-base problem, or a product-mix problem — and it is worth knowing which.

Check your real margin

Calculate your true gross margin, line by line

The LumixAI Upload & Analyse reads your sales data and calculates true product-level margin including fees and fulfilment — so you see which lines are really profitable.

Start free review → Or read the margin guide