What is the difference between profit margin and return on investment (ROI)?

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.

profit margin and return on investment graph

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%)

profit margin calculation

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%

return on investment calculation