What is the Difference between Profit Margin and ROI?
When it comes to calculating your profit, two different metrics can guide you: “ROI” (return of investment) and “profit margin“.
- Profit Margin: It is a profitability ratio that measures the amount of net income earned with every dollar of sales generated.
Profit margin can be calculated with the following formula: Profit / Revenue.
Here, the cost and fees should be considered to calculate the correct profit margin.
Let’s make it more clear with an example. You buy a product for $30 and want to sell it for $100. Amazon cuts of 15% fee, which means $15 goes to Amazon. As a result, the profit is $55. (Revenue ($100) – Cost ($30) – Fees ($15))
By calculating the profit, we can find the profit margin: Profit ($55) / Revenue ($100) = 55%
- ROI (Return of Investment): ROI measures the return on investment against the investment cost. It tells how much you gain for a single dollar you spend. The higher ROI, the better.
Return of investment can be calculated by the following formula: Profit / Cost
Based on the previous example, let’s assume the profit is $55, whereas the cost is $20. The ROI will be: Profit ($55) / Cost ($20) = 275%
Don’t be confused with all these numbers and formulas.
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