Understanding e-commerce finance basics is crucial for any brand owner.

I've witnessed 7-figure brands fail due to poor financial understanding, despite having strong products, marketing & everything else.

You don't need to be a financial expert to grasp the fundamentals.

As someone who transitioned from engineering to marketing, hated finance, I learned these essentials out of necessity.

Let me break down the basics simply, helping you focus on key financial metrics beyond just ROAS.

See Where Every Dollar of Revenue Ends Up

• Cost of Delivery (COD)

• Gross Profit

• Ad Spend

• Contribution Profit

• Operating Expenses

• Net Profit

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Disclaimer: This framework is not intended for accounting or tax reporting purposes — it's designed to help founders and marketers make smarter, faster decisions for growth and profitability.

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📊 Sales Breakdown – From Gross to Net

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Key distinction: Net Sales is your true product revenue (after discounts and returns). Total Sales adds taxes and shipping on top. Most platforms report Total Sales by default, but you should use Net Sales for financial analysis and profitability calculations.

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1. Gross Sales

→ Raw product value before any deductions. (Input)

2. Subtract: Discounts $

→ Promo codes and sales discounts. (Input)

→ Discounts %: (Discounts \\\\\\$ ÷ Gross Sales) × 100

3. Subtract: Returns $

→ Refunded orders. (Input)

→ Returns %: (Returns \\\\\\$ ÷ Gross Sales) × 100

= Net Sales

→ True product revenue (items that stayed sold).

→ Formula: Gross Sales - Discounts \\\\\\$ - Returns \\\\\\$

This is your core revenue - use it for margin and profitability calculations.

4. Add: Taxes $

→ Sales tax collected from customers. (Input)

→ Taxes %: (Taxes \\\\\\$ ÷ Net Sales) × 100

5. Add: Shipping $

→ Shipping fees collected from customers. (Input)

→ Shipping %: (Shipping \\\\\\$ ÷ Net Sales) × 100

= Total Sales

→ Final customer payment (total cash flow charged).

→ Formula: Net Sales + Taxes \\\\\\$ + Shipping \\\\\\$

Note: Most platforms report Total Sales by default. For financial analysis, focus on Net Sales.

🚚 Cost of Delivery (COD) – What It Takes to Fulfill Orders

COGS

→ Cost of Goods Sold (product costs). (Input)

COGS %

→ % of Net Sales spent on goods

→ Formula: (COGS ÷ Net Sales) × 100

Shipping – Pick & Pack

→ Labor + materials to prep & pack orders. (Input)

Shipping – Carrier

→ Postage/shipping service fees. (Input)

Payment Processor

→ Fees from Stripe, PayPal, etc. (Input)

Total COD $

→ All costs to fulfill an order

→ Formula: COGS + Pick & Pack + Carrier + Payment Processor

COD %

→ % of Net Sales used for delivery

→ Formula: (Total COD $ ÷ Net Sales) × 100

📣 Ad Spend – Total Advertising Cost

MER (Marketing Efficiency Ratio)

→ Measures efficiency of marketing relative to revenue.

Common calculations:

→ 1. (Net Sales ÷ Total Marketing Spend) → Blended ROAS

→ 2. (Total Marketing Spend ÷ Net Sales) × 100 → % of Net Sales