How Much Profit to Make on a Product?
Best way to figure out how much profit you are going to make on your product, we will have to look at ROI, Profit Margin, and Product Research
First, what is ROI? How you calculated? And what do you do with it? ROI stands for Return on Investment which ultimately means, what your profit is going to be after a sale. In order to calculate it, you need to use this formula:
The ultimate goal when you look for a product is to have an ROI of 200% which means that every time you sell your product, your profit will equal double your expense. But how do you calculate how much money you should make in order to have a 200% ROI? Well, let's say that your investment is $50. So if the profit must equal double of our expense that means that our revenue should be $150. $150-$50/$50=2x100=200% ROI. So if the expense is $50, we need to make $150 to have 200% ROI. Now, it is not mandatory to have this ROI, but if you find a product that sells and you can get it with a 200% ROI, go for it! Now, another formula used to calculate profit is the Profit Margin formula which shows you basically the same information but just in a different way. The formula is that you take the Revenue - Costs and divide by Revenue. In our example, it would equal 66% profit margin for your product.
But ROI is more useful for one important reason... CASH FLOW! Cash flow it is really important in a business. And if you have good cash flow, you will have a successful business. What cash flow is that you buy a product and then you sell it with a 200% ROI which means that you got your money back for that product but now you can buy two more with the profit you made. So next you are going to buy 3 products, sell them and now you can buy 6, and you see the pattern here. By using this ROI you will be able to double, if not triple your next round of inventory which means more money for you.
Next time you do product research, you can use this technique to calculate the ROI! But thanks to the internet, there is an easier way to calculate the ROI. With the AMZScout Google Chrome Extension, you can easily find the ROI and you can play with the numbers to find how much you should pay for the product to get a 200% ROI. You can find the cost of the product by searching on Alibaba. Input that price in the chrome extension and see what the ROI is. If the ROI is not at 200% you could negotiate with the suppliers to reduce the price or sell your product at a higher price.