Why you shouldn't look at ROI Margin is far more suitable
Return on investment, better known as ROI is a popular way of displaying profitability of certain investments.
In the case of selling on Amazon and in particular online arbitrage, it comes back when you look at the several leads services that are available.
They all advertise with ROI numbers.
However, we do not advertise or offer our leads with ROI, instead we use MARGIN.
And before you ask, yes there is a difference and in my opinion it is big enough to make the distinction.
You see ROI is a number that can exceed a 100%, because it is connected to probability, or in plain English, a number which indicates possible future earnings.
To clarify it even more, it answers the question of how big of a percentage you get back on the initial investment.
When you calculate your earnings with margin, you calculate how much of the total revenue is actual profit and therefore is always a percentage of your revenue.
Are you confused yet?
Don’t worry the numbers will make it all very clear to you!
Let’s use this simple example:
You sell a product for : $100
Your total purchasing costs are: $70
With Margin, you essentially subtract the costs from the revenue and whatever you have left is your profit, which in this case is 30% or $30.
When you look at ROI however, because the calculation is calculated differently and is based on probability, the percentage ends up being 43%.
Now I do hope we can all agree that we didn’t make $43 dollar.
And although ROI is not meant as such, our brains are wired to connect the two.
In case you are wondering how it is possible that these two methods come up with different percentages, you simply have to look at the formulas in question.
In any normal situation where you make some kind of profit, the ROI number will always be higher, simply because it was never intended as a way to determine your earnings on a single deal.
ROI is a number you would use on future earnings ( i.e. long term investments) and therefore it is our belief that it is not suited to calculate your earnings for Online Arbitrage.
Now why would someone use ROI you say?
Although I can’t speak for each and everyone of them, I do believe that higher numbers connect better when you try to sell people something.
And although it might hurt our business on the short term, we rather provide people with honest numbers they can rely on, where we include all the costs.
What do you mean with all the costs, you ask?
To take a practical example from our leads:
We bought an item at $15 and you can sell it on Amazon for $42.95.
Any other service would tell you that this would be an ROI of 186% or a whopping margin of about 65%.
We on the other hand include all the costs we can calculate and include FBA fees, shipping to Amazon and prepcenter fees.
If you take that into account the numbers look like this
The total cost of the item is $28.52 and you can sell it on Amazon for $42.95.
This means you have an ROI of 51% and a margin of 34%.
Hopefully this makes it clear to you that when most lead providers offer you a minimal ROI of 40%, that it could mean you could end up only making 2-5% on a particular deal.
We can of course help you with this!