Why Do Sellers Get Their Gross Profit Margins Wrong?

Nobody wakes up one morning and plans to run a business at a loss. Instead, sellers often unknowingly make critical mistakes that doom their business. Avoid these 6 mistakes Peter made, and your business will do much better.

1. Using Keystone Markup Without Justification

Many sellers, like Peter once did, apply a keystone markup—doubling their product cost and calling it a day. This feels simple and intuitive, but it’s often dangerously misleading. Without verifying whether that markup leaves enough margin for logistics, spoilage, fees, and marketing, sellers risk pricing themselves into the red.

In Peter’s case, he was charging what “felt right” based on industry norms. But when we broke down the unit economics, it became clear that his markup was too shallow to account for the additional handling, packaging, and temperature-controlled delivery. Keystone isn’t a pricing strategy—it’s a starting point that requires real analysis.

2. Getting Distracted by Revenue (While Profit Disappears)

Topline revenue can be seductive, but it doesn’t pay the bills. Peter was thrilled to hit $500K in revenue, but his bank account told a different story. Like many sellers, he believed that growth was the main indicator of success. In reality, that growth was hiding deep structural problems.

Focusing on revenue while ignoring gross margins is like celebrating how fast your car goes while the engine light is on. It looks great until it breaks down. At CronosNow, we help sellers shift focus from vanity metrics to meaningful financial indicators—like contribution margin, CAC vs. LTV, and net margin per SKU.

3. Only Using Competitor Benchmarking

It’s common for sellers to anchor their pricing strategy on what competitors are doing. Peter’s prices were directly influenced by a similar fresh food brand operating in a nearby city. But what he didn’t consider was that they had scale, better supplier terms, and an in-house delivery team.

By benchmarking against businesses with different cost structures, you end up building a business on unstable ground. Worse, if your competitors are underpricing or running at a loss, you’re just copying their failure. True pricing strategy needs to be based on your own cost structure, value proposition, and business goals.

4. Competing on Price Instead of Value

Peter initially tried to undercut his competition by a few dollars per box. The idea was to win more customers by being cheaper. But the strategy backfired—his razor thin margins meant he couldn’t invest in better packaging, delivery tracking, or customer service. Reviews suffered, and churn increased.

Competing on price is a race to the bottom. Competing on value—like better product quality, faster delivery, or loyalty perks—gives you pricing power and customer loyalty.

What Should Be Included in Cost of Goods Sold (COGS)?

COGS refers to the total direct cost of producing and delivering your product to the customer. It’s not just what the product costs from your supplier. It includes every expense directly tied to fulfillment:

• Product manufacturing & shipping costs
• Product packaging and labelling costs
• Freight to your warehouse
• Import duties & tariffs
• Warehousing storage costs
• Labeling, prep, or handling fees
• Pick & pack fees
• Marketplace fees
• Payment processing fees

 6. Not Leaving Enough Profit to Pay for Ads

As Peter’s margins tightened, he started cutting back on ads—just when he needed them most. His low gross profit left no room to invest in scalable acquisition. Even when he got decent ROAS, the profits just weren’t there.

Paid advertising isn’t optional in eCommerce. It’s a fuel source. But it only works when your gross margin can carry the weight. The smartest brands work backward—setting target margins based on what they expect to spend to acquire and retain customers. If you can’t afford to advertise, the business model needs rethinking.

One of the most common mistakes sellers make is underestimating how much of their gross profit will be consumed by advertising costs. With digital ad platforms like Facebook, Instagram, Google, and TikTok becoming increasingly expensive, failing to allocate enough margin for customer acquisition can quickly turn a profitable product into a money-loser.

If your gross profit margin is too slim—say under 50%—you’ll find it difficult, if not impossible, to run ads at scale while remaining profitable. Even a Return on Ad Spend (ROAS) of 2.5 might not be enough if your cost of goods is too high relative to your selling price. The result? You either stop advertising (which stalls growth), or continue spending and quietly bleed cash.

To avoid this trap, your pricing strategy must bake in room for advertising from the start. Smart brands work backward: they estimate how much they’ll need to spend to acquire a customer and then ensure their gross margins can absorb that cost while still leaving room for operations and net profit. In other words, if you can’t afford to advertise your product profitably, you don’t have a pricing problem—you have a margin problem.

Why You Need CronosNow to Get Your Real Gross Profit Margin

At CronosNow, we help eCommerce founders go beyond surface-level finances and see what’s really happening beneath the revenue line.

We specialize in eCommerce and CPG accounting, helping you:

• Track actual landed cost per product and shipment
• Allocate costs across bundles, returns, and promotions
• Understand profit per product, not just per month
• Maintain clean, investor-ready financials
• Spot and fix margin leaks before they snowball

Gross Profit Isn’t Just a Number. It’s the Lifeblood of Your Business.

Whether you want to grow, raise capital, or prepare to sell—clean, actionable financials are your foundation. If you don’t know what each sale actually earns you—after every cost—you’re flying blind. Let us help you get clarity, take control, and build a business that actually pays you back.

CRONOSNOW | CPG & ECOMMERCE ACCOUNTANTS
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