There are always these two things the people confuse between. The ROI (Return On Investment) and the margin which we also say Profit margin.
There are a lot of people who think these both things are same.
But, Wait for a sec!
Here in this blog, I will teach you each and every aspect about ROI and everyone’s favorite the Profit margin.
So without wasting any time, Let’s get our hands dirty into the ROI and Profit margin.
What’s in it
- What is Profit Margin?
- What is ROI (Return on Investment)?
- How to Calculate Profit Margin?
- How to Calculate ROI?
- ROI vs Margin
What is Profit Margin?
We firstly talk about the profit margin. Once we understand this, we will jump on to the ROI section. So let’s take the example to understand better,
Let’s say if you sold something for $10.
So whatever you pay for the item let’s say
You pay $2 to purchase any product.
You sell that product for $10, and you pay $3 fees.
So, there are $5 left after selling it.
Now, the profit margin is 50 percent because its 50 percent of the product that you sold.
And the money left for whatever the product sells for solo.
You have made $5 profit on that $10 of product.
What is ROI (Return on investment)?
The ROI ( Return On Investment ) means the money that you put down to the profit that you make on the money that you spend, and that’s what Return On Investment (ROI) is.
To understand it a bit deeper, let’s take an example:
For instance, I have a pen for 1 pound.
I sell it to you for 1 pound forty.
I have then made $40 profit which is forty percent of the price of that pen.
This is my Return on Investment (ROI) that I spent buying that pen. That’s it!
So that’s why these two things are very different things when you a 100 percent profit margin.
You don’t mean margin you mean Return On Investment (ROI) because it’s actually possible with the return on investment.
How to Calculate Profit Margin
When you start looking at the books of Finances and your full cost, and you look at the top line of your finance book says $30,000 for the month than other fees.
Like Amazon fees ( if you are selling online) maybe $10,000. Your cost of goods may be $5000 and your pr- service maybe $1000.
Then, in the end, you may end with $4000 so that’s the percentage that you would work out based on the $30,000 in sales.
Basically what I am saying is your profit, in the end, the margin of the $4000 and your operating margin depends on the sales, so now what you gotta need to do is just
Divide your profit and in this case $4000 by your sales and times in by 100
4000/30,000*100, and that equals your margin right!
Let me quickly summarize a bit in here you first need to work out on your profit, then divide it to the sales and multiply by 100 to get the percentage, which’s all equal to your profit margin.
But if you ask what a good or sweet spot to be in the profit is, so that’s 10 percent profit margin after all the cost you have, in this percentage you will get a good amount of profit margin.
And in the safe zone, higher than that is obviously great but lower than that you should start thinking on scaling up to at least 10 percentage.
How to Calculate ROI?
Return on investment (ROI) is the amount of money you get in return after investing in any things you want, but you can find ROI for a month also.
Let’s say you invest in the stocks, and you invest like a big chuck say like $30,000.
And you find your ROI for a month like 40%, which means this is the ROI you get this month for the money you spent on investment.
Let’s take an example
Let’s pretend you are selling on Amazon or any online arbitrage if you had 40 percent of Return on investment, and obviously, you are not taking any money out.
If you made the 40 percent return on investments than you started with a thousand pound, and basically you are making 40 percent ROI so left with $1400 after that and you just re-invest this money again.
So that’s 1400 with a 40 percent ROI, then you will get the 560 profit right! Then for the next month, you will have $1960 now.
So now you can see how your money is stack on one another and becoming big by just re-investing your previous profit.
You just started with $1000 dollars and spent that and make 40 percent of return on investment.
Then you got $1400, and you made a 40 percent of investment then you got $1960, and you have done the same again, and you get $2744.
And as you can see each time as an increase in the number obviously becomes higher and higher.
When you do this same process for the next month as well you will get $3841 and again next month 5378 and as you can see what my point to say that this business model,
Because you start with the $1000 and get it up to $5378 with just in the matter of months, but yeah you’re not going to get exact 40 percent ROI always.
Obviously there is some cost also you should deduct from this amount but in the end what matter is growth. It is surely happing as you can see above.
ROI vs Margin
So before Starting ROI VS Margin let me tell you that these two things are different than each other.
A lot of people get confused between them like someone make 300 percent of ROI vs Margin of 30 percent so what is the difference between them so let’s find it out in here down!!.
So we are going to understand RoI vs Margin with the help of a table.
The left side of the table gives information about ROI vs Margin is on the right side of the table.
So let’s say you go to the store and buy a book for a dollar like $1, and we are going to take food for this ROI vs Margin Comparison.
And let’s say you sell this for $ 15 and after your fees and shipping charges and after your cost of goods which is obviously $1 and after $15 of selling price let’s just put $15 on the right side of the Box.
After $15 of the selling price, you subtract your 1 dollar for your cost of good and every additional service.
Then you’ll see $10 back, so here’s the difference you just put a dollar, and you saw only $10 come back to profit margin now our 1 dollar has now become $10, and that means you have a thousand percent of ROI.
So you are using the negative ROI, and you will get the negative Profit Margin as well.
And move the margin in the ROI vs Margin comparison and let’s take that scenario again that $1 book scenario you sell this for $ 15.
After your fees, your shipping charges and your cost of goods which is obviously $1 and after $15 of selling price let’s just put $15 in the right side of the Box.
In this Box as well and we saw like $10 profit, here’s the difference between these two
In the ROI section, the $1 turned into $10, and we get thousand percentage of ROI simply, but here 1 dollar turned into 10 dollars is not a thousand percent of profit.
Profit depends on your sales number first. We call it gross sales, so here it all depends on $15 price tag.
So far I know that my book sold for $15 and I saw $10 profit after taking aside all the cost of good and all the fees.
And every expense that leaves me at 66% of net profit so now you can see the differences why most of the people get easily confused.
ROI vs Margin
$1 = cost of good (selling price)$15
$1 = cost of good (selling price)$15
$10 back in this case as well
So, in the end, I just want to say that ROI and Margin are all different, but in the ROI vs Margin section, you have understood already and can find for your business as well, so with wasting time, see you in the next blog.
The return with 5:1 is a good ratio, and 10:1 is pretty exceptional, but you can also get that.
100% ROI means that you have just got back double the amount of money that you have spent.
ROI = (Net Income + (Current Value – Original Value)) / Original Value * 100.