Question

What insight does ROI give into investment performance? Is it acceptable to lose product on one product, if that product is vital to the sale of an extremely profitable product? Please explain why?

Answer 1

Answer:

ROI = net income / investment

Investors will always prefer a higher ROI, as long as the project's risk doesn't increase due to the higher ROI. E.g. a very low risk project might have a discount rate = 5-6%, while a very risky project might have a discount rate of over 20-30%. The same applies to any type of investment, relatively secure projects or investments will relatively higher ROIs are extremely desirable. But as more people want to invest in them, the returns should fall to a more "normal" level.

Sometimes, you can lose when selling one product if that results in higher gains from selling another product. E.g. on my job we sell paper towels and napkins. Paper towels generally yield very high gains, but napkins usually result in a loss or at best a break even situation. But we use paper napkins as an "incentive" to sell paper towels. If we look at total volume of units, we sell much more paper napkins than paper towel, but paper towel sales yield 30 times more profit (on a per $ basis) than napkins. So we offer our clients a combo of a discount on napkins if they purchase a certain amount of paper towels.