If a product costs ₹400 and sells for ₹600, the ₹200 difference is not automatically your profit. Packaging, shipping, payment charges, customer acquisition and failed deliveries can use up that difference. Start with the costs of a completed order, then decide whether customers will accept the required price.
1. List the costs you actually pay
Create a sheet with separate rows for the product and inward freight, packaging, outward shipping, payment or marketplace fees, discounts, customer acquisition and an allowance for returns or failed deliveries. Keep monthly software and other fixed expenses separate initially so you can see both contribution per order and overall business profit.
Use written supplier and service-provider quotes where possible. Label unknown amounts as estimates. A precise-looking total built from guesses is still a guess. Reconcile those estimates against your actual invoices after the first orders.
2. Work through one illustrative order
This simplified example excludes tax calculations and fixed overhead. All figures are hypothetical, including the payment fee; they are not a quote from any provider.
| Item | Amount |
|---|---|
| Revenue retained for the order | ₹699 |
| Product and inward freight | ₹400 |
| Packaging | ₹20 |
| Customer delivery | ₹60 |
| Payment charge | ₹14 |
| Expected returns and failed-delivery cost allocation | ₹35 |
| Customer acquisition | ₹80 |
| Total variable costs | ₹609 |
| Contribution before fixed costs and tax effects | ₹90 |
The contribution is ₹699 − ₹609 = ₹90, or approximately 12.9% of revenue. It is not final net profit. Monthly expenses still have to be paid. Also avoid double-counting: if your product cost already includes inward freight, do not add the same freight again.
3. Understand margin and markup
With a ₹400 product cost and ₹600 selling price, the difference is ₹200. Markup on that product cost is ₹200 ÷ ₹400 = 50%. The corresponding gross margin before additional costs is ₹200 ÷ ₹600 = 33.3%. The two percentages use different denominators.
Always state which costs your margin includes. A product-only margin can look healthy while contribution after delivery and acquisition is negative. For a basic explanation, see Shopify's profit margin calculator.
4. Work backwards from a target contribution
If fixed-rupee variable costs per order total C, percentage-based fees are f of the selling price, and the desired contribution share is m, the simplified formula is price = C ÷ (1 − f − m). Both percentages must be entered as decimals, and their sum must be below one.
For example, with C = ₹550, f = 0.02 and m = 0.20, the calculated price is ₹550 ÷ 0.78 = ₹705.13. This model assumes the percentage fee uses the same revenue base and excludes tax complications. It does not prove customers will pay that price. If the market price is lower, revise the costs, offer or product rather than pretending the target margin exists.
5. Treat returns and COD carefully
Estimate failed-delivery costs from actual outcomes as evidence builds. Include forward and return freight where charged, non-refundable fees and lost or damaged goods. Recoverable stock is not automatically a total product loss. Choose a consistent denominator, such as delivered orders in a completed order cohort, and allocate the cohort's failed-order costs across it.
A newly placed COD order is not collected revenue. Review delivered orders and settlement records so cancellations and RTO do not make the business look more profitable than it is.
6. Check discounts before offering them
In the ₹699 example, a ₹50 discount reduces retained revenue to ₹649. If the other assumptions stay approximately the same, contribution falls from ₹90 to about ₹40, with a small possible change in percentage fees. A modest discount can therefore remove a large share of contribution.
7. Review cash and tax separately
Bank settlement and profit are different measures. Settlement timing affects when you can pay the next supplier, while profit depends on all relevant costs. If tax applies, use a consistent tax basis and obtain qualified advice about rates and recoverable input taxes; this article does not prescribe a tax treatment.
Your next step
Calculate three scenarios: expected costs, higher shipping or returns, and a discounted price. Write down the lowest acceptable contribution before you launch. Update the sheet after real deliveries instead of retaining optimistic assumptions indefinitely.
Continue with the next decision
- Compare supplier quotes and landed costs
- Compare COD and prepaid orders
- Validate a product before investing
Want the wider launch sequence in one place? Explore the Leviative Ecommerce Roadmap for beginner frameworks on research, store setup and operations. Educational content; no income or business results are guaranteed.