Return on Investment

This is probably the most important key performance indicator when deciding about a new private label product from China.

„Return on investment (ROI) is the benefit to an investor resulting from an investment of some resource. A high ROI means the investment gains compare favorably to investment cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.In purely economic terms, it is one way of considering profits in relation to capital invested.“
(from wikipedia)

For us common FBA private label sellers, a ROI of 100% or better should be our minimum requirement. It is quite simple to calculate this value:

ROI = margin / purchase price

Usually you have a delivery time of about 4-5 weeks. So this is the time your product needs to be produced, delivered and booked into amazon warehouse. When you place a second order at your manufacturers site, you need to pay at least 30-50%, sometimes even the total some, before he starts producing your goods.

So you really get in trouble, if you do not have enough cash at this point of time. So what is the way to go? Correct! Having a good ROI!

The following two examples will show you the difference between a ROI less than 100% and one above 100%

Example 1 – ROI of 50% (Bad)

Let’s set the folowing assumptions:

sales price: $ 15.00
amazon fees: $ 6.00
purchase price: $ 6.00
margin: $ 3.00
delivery time: 4 weeks

With these numbers we have the following scenario:

We place our initial order of 200 pcs in week 1. The order costs us $ 1,200. We start selling the product in week 4 with a weekly sales of 50 pieces. This is an income of $ 450 per week. As our product is selling quit good, we will run out of stock in week 7. This forces us to re-order in week 5. Unfortunately, we do not enough cash to place the order in time, so we can first our order in week 6. You see: There are no sales in week 8, as there is no stock.

In case you also want to grow with your business, it is really hard with such a low ROI. You will see in example 2, with a better ROI, growth is much easier.

Also, you do not have any „back up cash“ in case of unforeseeable issues.

Example 2 – ROI of 133% (Good)

Let’s set the folowing assumptions:

sales price: $ 20.00
amazon fees: $ 6.00
purchase price: $ 6.00
margin: $ 8.00
delivery time: 4 weeks

With these adjusted numbers we have the following scenario:

It’s nearly the same as in scenario 1, but we can sell to a higher price of $20. Therefore our margin and ROI is much better.

This great situation allows us to re-order in time. So there is not one week without any sales as in example 1. Regarding growth, we could even re-order twice the quantity in week 9. In the table above I assumed a bigger order quantity of 500 pcs in week 13.

The respective graph looks like this:

roi_example2_graph