ROI vs profit margin: which should wholesale sellers trust?

They sound similar and are easy to mix up, but they answer different questions. Here is when to use each.

Two different questions

Profit margin asks how much of the selling price you keep. ROI asks how much you earn on the money you put in. A product can have a modest margin and a very good ROI, or the other way round, which is why you need both.

The formulas

• Net profit per unit = selling price - product cost - Amazon fees - other costs per unit.
• Margin = net profit / selling price.
• ROI = net profit / total cost you paid (product cost plus inbound and prep).

Sell a product for 25.00 that costs you 15.00 with 6.50 of fees and other costs. Net profit is 3.50. Margin is 14 percent and ROI is about 23 percent.

Which one to use

Use ROI to compare products, because your real limit is cash. If you have 5,000 to spend, you want the products that return the most for each unit of money tied up, and ROI measures exactly that.

Use margin to judge how safe a product is. A thin margin means that a small price drop, or a fee increase, turns a profit into a loss.

Do not forget time

A 40 percent ROI that takes six months to sell is worse than a 20 percent ROI that sells in three weeks, because you can reinvest the money sooner. Pair ROI with an estimate of sales per month before you decide.

A simple rule of thumb

Many wholesale sellers look for at least 25 to 30 percent ROI and at least 10 to 15 percent margin, and then use sales speed to choose between what is left. Treat these as starting points and adjust them to your own costs. Try the free profit calculator on this site to check any product in seconds.