Using Amazon ROI to Maximize Profit Margins
Updated May 3, 2023.
Return on investment (ROI) is a measure of the efficiency of an investment, usually expressed as a percentage of the investment's original cost. It compares the amount of money gained or lost on an investment relative to the amount of money invested. The higher the ROI, the more efficient the investment.
Difference Between ROI and Profit Margin
One of the most important distinctions in business is the difference between ROI and profit margin. They may sound similar, but these two concepts are actually quite different.
ROI measures how much money you make on your investment, while profit margin measures how much you make on each dollar of sales. In other words, ROI tells you how efficient your investment is, while profit margin tells you how efficiently your company converts revenue into profits.
COGS, or the costs of goods sold, is another important metric that Amazon merchants should keep their eyes on. Check out this guide to see how to calculate cogs for your Amazon business.
» Find out 4 ways to increase your marketing ROI with dynamic pricing
How to Calculate ROI and Profit Margin
Calculating ROI and profit margin are essential for all businesses, regardless of their size or industry. The first step is to calculate your ROI, which is expressed as a percentage of the profit you earn on your investment. This is calculated by subtracting the initial value of an investment from the final value of an investment.
For example, let's say your business invested $2,000 in advertising. One year later, the advertisement campaign generated $10,000 in profits. Therefore, the net profit was +$8,000. With these numbers, the ROI calculation would be:
(8,000/2,000) x 100 = 400
This means that the initial investment in the advertisement campaign generated a 400% return on investment.
Once you have your ROI, you can then calculate your profit margin, which is the percentage of each dollar earned that results in profit. This can be calculated by dividing net profit by net sales.
For example, let's say a business generated a profit of $10,000 from $25,000 of net sales. The ROI calculation for this would be:
(10,000/25,000) x 100 = 40
In other words, the business has generated a 40% profit from $25,000 in sales.
Knowing these two numbers will give you a clear picture of how efficiently your business is running and where it could improve. It will also help you make more informed decisions about where to allocate your resources.
If this looks too complicated, time-consuming, or both, there is an easier way to calculate profit for Amazon merchants. To do so, check out the best profit calculators for Amazon here.
Healthy ROI for Amazon FBA Sellers
For Amazon FBA sellers, a healthy ROI is essential for the success of their business. Sellers need to keep track of their expenses to minimize these as much as possible and boost sales through effective marketing to ensure that their profits exceed their costs. There are a number of considerations that factor into calculating a seller's ROI, including the cost of inventory, shipping costs, and Amazon fees.
So what is a good ROI for Amazon FBA sellers?
An ROI of around 100% is considered sustainable. Anything lower than this is working on profit margins that are too tight, putting a business at risk.
For further reading, see how to track and calculate profit on Amazon here.
Amazon ROI Strategies to Maximize Profit
Sellers seeking a way to improve Amazon ROI should focus on keeping their costs as low as possible. Sourcing products from wholesalers or manufacturers can reduce inventory acquisition costs, and shipping costs can be reduced by using a fulfillment company like Fulfillment by Amazon (FBA). Amazon fees can also be minimized by using the right selling plan and taking advantage of promotional opportunities.
If you'd like further insight into how to maximize e-commerce profits, see our guide on ways to improve profit here. Or, to kick-start your earning potential, check out the best products to sell online in 2022 here.
