What’s the Difference Between ROI and Profit Margin?
Here’s a simple guide on how to choose which method to automatically set your Min and Max prices
Written by Dillon Carter
Updated over a week ago
It may feel overwhelming when you’re trying to decide which pricing method you want to use (so that Aura can automatically create Min/Max prices for your listings) but we can lighten that load for you.
Here’s the simple difference between Return on Investment (ROI) and Profit Margin
Return on Investment
Return on Investment (ROI) is the most common choice. Why? ROI allows you to easily know how much money you get back for every dollar you spend on inventory.
As an example, if I have an average ROI of 20%, I know that for every $1 I spend, I will get back $1.20.
Here’s how to calculate your ROI:
ROI = Profit / Total Cost
Based on our simple example above - ROI (20%) = Profit ($0.20) / Total Cost ($1.00)
Profit Margin
Profit Margin is not used as frequently but is the next best pricing method. Where ROI focuses on what you invested in your inventory, Profit Margin is focused more on the total price you sold your inventory at and can never exceed 100%.
As an example, if you purchased a unit for $1, had total fees of $2, and sold the unit for $10, your profit margin would be 70%.
Here’s how to calculate your Profit Margin:
Profit Margin = Profit (revenue - costs) / Revenue
Based on our example above - Profit Margin (70%) = Profit ($7) / Revenue ($10)
Hopefully, this gives you a nice overview of each method. There are pros and cons to each but we generally recommend Return on Investment as we consider inventory an investment.
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