# 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.