What is Return on Sales (ROS) and How is It Calculated?

Does your business manage the money it makes from sales well? A profitable mid-sized business could waste a lot of money in marketing, sending most of the money out as fast as sales come in. An even larger business could blow the budget on R&D, and operate a razor thin margin.

Return on sales (ROS) is the metric that answers, "How much do we keep of every dollar we make in sales?" Let's discuss why that's important, how it's calculated, and how you can maximize this ROS to give your business a boost.

• What is return on sales?
• How do you calculate return on sales?
• What is a good ROS?
• Why is return on sales important?
• 5 ways to improve your ROS

Return on sales is the ratio of operating profit to net sales, demonstrating how much of your revenue translates to profit. Also known as operating profit margin, operating income margin, or Earnings Before Interest and Taxes (EBIT) margin, it's expressed as a percentage and is typically used to track performance over time or compare with similar businesses, rather than being a direct piece of sales analytics.

Return on sales (ROS) is a measure of how much of each dollar of sales turns into profits. It includes things like the cost of goods sold (COGS) and operating expenses (like marketing and R&D), and excludes things like taxes and interest, to highlight overall operational efficiency rather than financing costs.

Return on investment (ROI) is recorded as the returns attributed to the investment divided by the cost of the investment:

(ROI = net return / investment cost)

An investment could be anything that is expected to generate a return in the future, like new equipment, property, or product research. The key thing is interpreting how much revenue can be attributed to that investment.

ROS is concerned with keeping the money you make through sales, prioritizing operational efficiency. Leaders and investors can use this to see if a business has the potential to keep even more.

Net profit margin uses the profits after taxes and all other expenses are subtracted, divided by net sales. Profit margins are concerned with the actual money in the bank after all expenses, and this ratio helps leadership and investors figure out if a business is earning them enough to be worth continuing operations.

Note: This is only using net sales after expenses, not total revenue — learn more about gross sales vs. net sales.

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The formula for return on sales is this:

ROS = (Operating Profit / Net Sales) x 100

The higher the result, the greater the percentage of money kept from each dollar of revenue, and the more efficient a business is operating. By contrast, the lower the result, the less efficiently it's operating, which can indicate overspending on any number of things, such as marketing (see an ROI guide for marketing analytics).

Follow these steps to calculate ROS:

1. Calculate total revenue (including all income streams)
2. Deduct cost of goods sold (COGS)
3. Subtract operating expenses (SG&A)
4. Make sure to not include interest payments or taxes
5. Divide by total revenue (AKA net sales)
6. Multiply by 100 to make it a percentage

Remember, our formula is (Operating Profit / Net Sales) x 100. Follow these steps to implement it:

1. Operating Profit = Operating Income - Operating Expenses. So that's Revenue ($10,000,000) - Returns ($1,000,000) - COGS ($2,000,000) - SG&A ($4,000,000) = $3,000,000
2. Remember: we ignore depreciation, interest, and taxes.
3. Now, find Net Sales. That's Revenue ($10,000,000) - Returns ($1,000,000) = $9,000,000
4. Plug everything back into the formula. Operating Profit ($3,000,000) / Net Sales ($9,000,000) = 0.333
5. Multiply by 100 for a Return on Sales of 33.3%

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The answer to this question is "It depends." It's relative to the company's size and its industry, as these can vary wildly across sectors. It also depends on the company's past performance and sales planning. Ideally, ROS should either stay stable or increase as a business grows. If it shrinks as revenues increase, the company might be spending too much to try and grow, and if it shrinks with stagnant revenue, it's becoming less efficient with time.

I've included what the average ROS for each industry is in my experience.

Let's take a look at a few industry examples:

ROS for healthcare ranges widely, with acute care hospitals maintaining an ROS of around 6%, orthopedic facilities sitting at 20%, and surgical specialties centers boasting an average 30% rate.

All types of healthcare services are impacted by compliance requirements, workforce shortages, and rising labor costs, plus insurance reimbursements. But they differ because these expenditures can be made up for with operational efficiencies like specialization, which means reduced foot traffic and less variety of staff, equipment, and supplies.

A good return on sales range for hospitality is 8-15%.

Hotels' ROS is affected by location, brand, and operational costs, such as staffing, utilities, and maintenance. Luxury hotels and resorts tend to have higher ROS because their fees rise disproportionately to increased operational costs, while budget or economy hotels might see lower ROS.

A good return on sales range for manufacturing is 6-8%.

The manufacturing sector demonstrates diverse profitability patterns, with industrial and commercial machinery on the lower end while primary metal industries can reach closer to 8%. This ultimately comes down to cost structure. The factors influencing manufacturing ROS are how well they allocate their resources, the length of time in their sales pipeline, the efficiency of their supply chains, and investments in production technology (the costs of which are not calculated in ROS since these are depreciating assets).

A good return on sales range for restaurants and bars is 3-7%.

The type of restaurant (fine dining, fast-casual, or quick-service), location, and food costs all play a role. Restaurants with high labor costs or low sales volumes may see a lower ROS, while those that can control food costs and manage labor efficiently tend to have higher returns.

A good return on sales range for retail is 2-5%.

Keeping healthy profits is tough in this industry because of its high operational costs and intense competition. Any retail business with ROS below 5% faces substantial operational obstacles and struggles with long-term financial stability.

A good return on sales range for technology firms is 10-20%.

Tech has remarkably higher ROS benchmarks than traditional industries, and can even exceed 20% in many cases. It makes sense because it is uniquely able to scale operations while maintaining lower operational costs. Firms that succeed in the industry are just more profitable, thanks to that and stronger pricing power, high margins on digital products, and efficient cost management.

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Return on sales is valuable because it helps zero in on a business' operational efficiency. It can demonstrate whether the company has issues with operational performance, the efficiency of its management, and more.

Business leaders and investors can use ROS to determine a business' ability to pay back loans, help make financial decisions, optimize its operations, set sales forecasting goals, compare against competitors and industry benchmarks, and drive sustainable growth.

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Once you've calculated your return on sales and understand what it's telling you, that's not the end of the story. You can improve the operational efficiency of your business by adjusting your pricing, cutting costs, or increasing sales. Let's dig deeper into these strategies:

Since ROS deals with sales, it's important to look at how pricing affects your sales overall. Understand your market position and how much value your customers place on your products and services. Start by conducting customer research to learn their preferences and perceived value, and analyzing price sensitivity across your market. Test various price points through promotions and other methods to find the right fit. Monitor the performance, and adjust based on your market response. Here are some pricing strategies to test:

This basic method focuses on your business, making sure you always turn a profit by adding a margin on top of your various expenses. This may work in a vacuum, but it leaves you vulnerable to competitors with more sophisticated price structures.

Set price based on perceived value to customers instead of production costs or competitors' prices. If you can match or undercut that perceived value, you can compete on these prices. It requires clear communication of your product benefits and strong customer relationships. You could also use channel sales through partnerships to increase value for all parties.

Adjust prices in real time based on market conditions to maximize your revenue. To succeed at this, you need to have insight into seasonal variations, your customer segments' behavior, and competitive pricing movements. Sophisticated data analysis and even things like AI for sales can make it easier to operate in a data-driven way.

Rather than increasing revenue from each sale or increasing sales, you might try to cut costs. You have to look into both fixed costs which are constant, and variable costs which change based on your company's output. Start by analyzing your cost structure with these steps:

1. Conduct regular cost audits to identify inefficiencies, which helps you know where to make improvements.
2. Analyze marginal costs for each additional unit of production, which can help you either eliminate inefficient products or know where to cap production.
3. Implement data-driven decision-making processes, which help align your leadership around what cost structure decisions to make.
4. Reduce supply chain costs by switching vendors or renegotiating terms, which helps increase your operating profit.

Operational efficiency directly impacts your gross profit by reducing unnecessary expenses while maintaining or improving output quality. You can use process automation for routine tasks to reduce manual labor costs and minimize errors, and optimize your resources through better allocation and scheduling. Identify and eliminate wasteful activities that don't add value. And move to digital tools to monitor and control costs more effectively.

The same amount of sales could be made in less time and fewer sales could be lost with a smoother sales process. Since ROS is a measure of the efficiency of dollars from sales, anything from better qualification of leads to improving digital sales experiences can help increase it. Taking advantage of sales automation could help you cut back on the cost per closed deal, and enhance your sales growth rate which would be a positive indicator to go with improving ROS.

Sometimes it's not about how many sales you make, but more about how much it costs to make those sales. Consider niche cases like this:

• Invest in the customer experience on your site and apps, making it smoother and easier to do business with you and removing points they can churn out. While good UX and developers can cost a lot, you might be surprised at the return on experience (ROX) you can earn.
• Invest in sales analytics software that helps you discover patterns among deals you win, and those you lose. This can help you both focus on leads with higher likelihood to close and thus save time, and also inform you about common issues you could overcome to start winning some of those lost opportunities.
• Pay attention to the little things that add up. For example, if you have a team of outside sales reps, advanced sales route planning could reduce things like gas and billable hours spent driving, meaning more sales are achieved with fewer dollars spent.

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Return on sales takes your operational profit divided by your net sales to tell you the ratio of profit to revenue. This tells business leaders and investors alike how efficient your operations are, which is great for highlighting areas of improvement for better profits, and for comparing against industry peers of a similar scale. Everything from how you sell to how you produce your products is a target for improving your efficiency. But as long as you know your return on sales, you'll be able to keep more of your company's hard-earned sales revenue.