What is the difference between profit margin and return on investment (ROI)?
Understanding and accurately calculating your Profit Margin and Return on Investment (or ROI) for a sale is crucial when determining how much profit you will make from a sale.
To have a firm grasp on your overall profit, you first need to understand how Profit Margin and ROI is calculated.
How can I calculate my Profit Margin?
Profit margin is calculated as Profit / Price (or Revenue).
For example, if you bought an item for $2.18, sold it for $9.59, and Amazon took a cut of $4.63 your profit would be $2.78 and your profit margin would be 29%.
Profit = Price or Revenue ($9.59) – Fees ($4.63) – Item Cost ($2.18)
Your Profit: $2.78
Profit Margin = Profit ($2.78) / Price ($9.59)
Your Profit Margin: 28.9% (round off to 29%)
How can I calculate my Return on Investment (ROI)?
ROI is calculated as Profit (revenue – all fees – all costs) / Product Cost (cost of goods) * 100.
Using the same example as above: your product cost is $2.18 and it sold for $9.59 with a $4.63 fee. In this scenario, you would have a profit of $2.78 and Return on Investment of 127.5%.
Remember, profit is your Price or revenue ($9.59) – Fees ($4.63) – Item Cost ($2.18) = $2.78
ROI = Profit ($2.78) / Product Cost ($2.18) * 100 (for percent calculation) =127.5%