Estimated Profit Margin % and ROI

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New Profit Calculator’s Estimated Profit Margin % and Return on Cost of Goods Sold

 

There are two common ways to estimate profitability in the business world – one is to consider the profit margin, and the other is to calculate Return on Investment. Profit margin % is calculated by breaking down the item price into cost and profit, whereas ROI focuses on the investment value of a product.

  • Profit % is calculated based on the offer price (Min or Max)

Our current formula: Profit % = Profit (offer price – total cost) / Sale Price

Example: You purchased an item for $45, and it was sold at $100. After taking into account the product cost ($45), assumed FBA fee of US$10, and 15% Amazon Referral Fee ($15), your net profit margin is 30%, which is calculated by $30 / $100.

Now if you were able to sell the product at $500, your profit % will NOT be 150% (30% x 5). Since the Amazon Commission (%) is based on the Selling Price, the higher the price the greater the fee you need to pay to Amazon. Thus, your new cost is now $130 (product cost $45 + FBA fee of US$10 + commission $75). The new Profit % is now 74% (($500 – 130) / $500).

  • Return on cost of investment (ROI) or markup is based on the total cost (purchase cost + handling/shipping + FBA Fee)

If you wish to set your Min or Max price based on a percentage of your actual cost, then you are looking to calculate ROI, or in other words, Markup % or Returns on the Cost of Goods Sold (COGS).

FormulaMarkup % = (Offer Price – Costs) / Cost

Example: You bought a product at $45 and you decided to price the item at $100. If you do not consider all other cost, the Return on the $45 is 122.2% ($55 / $45 = markup). In reality there are other fees to consider. If we assume the other fees (such as handling/shipping fees and FBA fee) to be around $10, your total cost is $55 before the Amazon’s commission. With Amazon’s 15% commission, the actual total cost is $70 ($55 + $15). The final return on the $70 listing at $100 offer price is 42.9% (($100-70) / $70). Now if the product was able to sell at $500, your Markup or Return will be 284.6% on the $130 cost (($500 - $130) / $130).

In summary

In both examples the product was sold at $100 and purchased at $45 with the end payout of $30. However, based on different profit models, the profit percentage will be calculated differently. With the $500 example, when you look at the profit %, 74% is profit and 26% is cost. The Markup % shows you that this item can return 284% of what you paid for.

Our new Profit Calculator uses the Profit % based on the Min or Max price.

It is not the Markup % or ROI on Inventory. Our Bulk Action currently supports using Cost as the base to Set up the Min and Max.

bulk_set_min_max.png

We are trying our best to use feedback from our customers to display and calculate the most accurate numbers. Please let us know if you have any advice, thoughts, or ideas for improving the new profit calculator.

Here is an article on Investopedia that explains the difference between the Profit Margin and Markup as “telling different sides of the same story.”

(http://www.investopedia.com/ask/answers/102714/whats-difference-between-profit-margin-and-markup.asp)

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