If you’ve been running an ecommerce business for more than 15 minutes—whether on Shopify or another platform—you’ve likely encountered the overwhelming array of performance metrics or key performance indicators (KPIs). From conversion rates to return on ad spend, these numbers can paint any picture you want, often distorting the reality of your profitability.

The Vanity Metric Trap in Ecommerce

Picture this: You’re at an ecommerce conference, and someone brags about their team size. Since when does a bloated payroll signal a profitable company? It doesn’t. Let’s break down a subtler example: conversion rate. A 12 percent conversion rate on your Shopify store sounds impressive, right? But if you’re only driving 100 visitors a month, it’s meaningless for profitability. Or take return on ad spend (ROAS)—an 8.5 sounds amazing until you realize the business has a -35 percent net margin because ad spend doesn’t cover sky-high expenses.

Even net income can mislead. A company pulling in $1 million in net income annually seems solid—until you see it’s against $750 million in revenue. A 0.1 percent net margin isn’t a loss, but it’s far from ecommerce profitability gold. The truth? All metrics are vanity metrics without context—except one.

The Magical Metric for Ecommerce Profitability

Brace yourself—this metric might make your eyes roll back. It’s called contribution margin. Before you tune out, let’s reframe it as “happy dollars”—a term that’s far less intimidating, especially for Shopify store owners or ecommerce platforms like Pentane.

Happy dollars are what’s left after you subtract all variable costs from your revenue. Think cost of goods sold (COGS), credit card fees, shipping and fulfillment, and marketing expenses like those Shopify ad campaigns. These variable expenses ebb and flow with your sales volume—rising as your ecommerce revenue grows and shrinking when it dips.

How to Leverage Happy Dollars on Shopify

So, what do happy dollars do? They cover your fixed expenses—payroll, rent, health insurance, legal fees, or even that luxurious office snack bar stocked with green M&Ms. These operational expenses (OpEx) stay steady whether your Shopify store makes $100,000 or $10 million in sales.

Here’s the ecommerce profitability equation: If your happy dollars exceed fixed costs, the surplus is your net income. Want to boost profitability? Increase happy dollars, cut fixed expenses, or—better yet—do both. For Shopify merchants or Pentane users, this could mean optimizing ad spend or streamlining shipping costs.

Where the Magic Happens for Ecommerce Success

Let’s say you tweak your customer acquisition strategy—maybe a new Shopify marketing app, a bigger ad budget, or a switch to a different paid media agency. How do you know if it’s working? Look at your happy dollars over time.

Are they trending up? Great—your changes are driving more profitability, adding dollars straight to your bottom line (assuming fixed costs stay stable). Are they dropping? Something’s off—either the strategy isn’t working, or a process is broken. This is where tools like Pentane or Shopify analytics shine, helping you track these shifts in real time.

Tracking Happy Dollars for Long-Term Profitability

The catch? You must monitor happy dollars consistently. For ecommerce businesses, this means observing how variable costs—like advertising or fulfillment—impact profitability month over month. Calculating this manually in a profit and loss statement (P&L) can be a nightmare, especially with fluctuating Shopify sales. My advice? Use a reliable system or software—whether it’s Pentane, spreadsheets, or another platform—to crunch and track the numbers accurately.

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A slightly modified version of this article was written for Inc.com by Pentane founder, Adam Callinan