Return on investment tells you how hard your money is working. Whether it’s a batch of stock or an ad campaign, the formula is the same.
ROI = (Net profit ÷ Cost of investment) × 100
Net profit is what you earned above what you put in, and the cost of investment is the money you committed. ROI answers a different question from profit margin: margin asks “how much of each sale do I keep?”, ROI asks “how much did my money grow?”
Basic ROI ignores how long the money was tied up. A 60% ROI in one month is far stronger than 60% over two years. When comparing options, factor in the time and the risk — a lower ROI that recycles quickly can beat a higher ROI that sits still. And remember: high ROI with a thin margin still needs healthy volume to add up.
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The profit margin formula explained with step-by-step worked examples.
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A step-by-step pricing method that protects your margin from day one.
What Is a Good Profit Margin?
Healthy margin benchmarks by industry and how to know where you stand.
How to Calculate Break-Even Point
The break-even formula, contribution margin, and how many units you must sell.
Cost of Goods Sold (COGS)
What counts as COGS, what doesn't, and the formula to calculate it.
Gross Profit vs Net Profit
The difference between the two, with a worked income-statement example.
Average Order Value (AOV)
The AOV formula, why it matters, and proven ways to increase it.
How Discounts Affect Profit Margin
Why a small discount cuts profit hard, and the extra volume needed to break even.
Contribution Margin
What contribution margin is, the formula, and how it drives break-even.
Fixed vs Variable Costs
The difference, why it matters for pricing, and how to classify your costs.
Keystone Pricing
The classic 2x markup rule — what it is, the margin it gives, and when to use it.
Retail vs Wholesale Pricing
How to price for both channels without eroding your retail margin.
How to Increase Profit Margin
Ten practical, tested ways to widen your margin without losing sales.
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ROI = (net profit ÷ cost of investment) × 100. If you invest $1,000 and it returns $1,300, your net profit is $300 and your ROI is ($300 ÷ $1,000) × 100 = 30%.
Profit margin measures profit as a percentage of revenue (sales). ROI measures profit as a percentage of the money you put in. A product can have a high margin but poor ROI if it ties up a lot of capital or sells slowly.
It depends on the investment and the timeframe. For inventory, sellers often look for 100%+ ROI per cycle; for advertising, a positive ROI (ROAS above break-even) is the minimum. Always compare ROI against the time it took and the risk involved.
Advertising ROI = (revenue from ads − ad cost − cost of goods) ÷ ad cost × 100. A related metric, ROAS (return on ad spend), is simply revenue ÷ ad cost, but true ROI also subtracts the product cost so it reflects actual profit.
Basic ROI does not — a 30% return in one month is far better than 30% over three years. For fair comparisons across different periods, annualise the ROI or use metrics that factor in time, like annualised return.