Cost-benefit analysis of an investment. ROI=(profit minus cost)/cost. ROI would be 90% if you made $10,000 from $1,000. Investment calculators usually provide this. ROI can be used to evaluate a potential investment, your marketing campaigns (for marketing accountability), or business plans to start a business. Return on ad spend (ROAS) is similar but focuses on specific tactics like a business-growth ad campaign.
Business metrics for profitability and financial health vary. Return on investment (ROI) is a popular and effective investment strategy and marketing strategy, such as PPC.
This article covers all the basics of ROI, from the ROI formula calculation to ways to boost ROI and its limitations.
What is Return on Investment?
Business investments include time and money. Investment returns are profits.
ROI is net profit divided by investment cost.
ROI is most useful for business goals when it refers to something concrete and measurable to identify investment gains and financial returns. Because it’s easiest to quantify, calculating ROI using time as an investment is less popular than using monetary cost.
ROI is also used for return on equity, return on ad spend, return on assets, social return on investment, and more.
Buying stock or financing a business are often called “investments.” Your business investments are different but aim to boost profits.
Investments vary by industry. They don’t have to be tangible, like new equipment or better materials. For example, an online store owner or app developer may invest in more digital goods like cloud-based storage services or a subscription to a new content management software, which may have maintenance costs. It would be desirable to identify the ROI.
Advertisements and retail leases are other business investments.
How to calculate return on investment?
ROI is the net profit divided by the cost of investment multiplied by 100 to get a percentage. The equation:
ROI = Net Profit/Investment x 100.
Your company’s P&L statement should provide net profit.
Practical ROI calculation
Here are some business ROI examples.
Sara’s online store
Sara sells cat-themed goods online. She buys social media ads to boost sales during the holiday season. To draw holiday shoppers, she spends $1,000 on social media ads.
Sara calculated her net profit after the holidays and found her e-commerce store made $5,000 more than last year. She then calculates ad ROI:
ROI = ($5,000 / $1,000) x 100 = 500%
Sara made $5 for every dollar she spent on ads. She can budget for more holiday spending after seeing this strong ROI.
What’s the point of ROI?
ROI calculations show how an investment benefits your business. This helps you evaluate past business decisions and inform future ones. ROI calculations can also help you choose new business opportunities.
You can focus on similar investments if they make a lot of money. Investments that fail to cover their costs may indicate that you should try a new strategy or invest in a different business area.
ROI determination issues
ROI can be tricky. Some investments overlap, making it hard to determine the most profitable.
Sara may be unable to determine which social media platform contributed most to her returns from her ad spending. Her sales may also be due to ongoing investments like a monthly email newsletter campaign or word-of-mouth marketing.
Despite the difficulty of calculating ROI, the metric is useful for ensuring you earn more than you spend. Instead of worrying about ROI accuracy, consider how to measure results with each new investment.
How to improve your return on investment?
The best way to boost returns depends on your investments. Before investing, try a few universal strategies to increase your ROI.
Sara’s social media spending shows the value of advanced analytics tools. Consider reporting features when investing in platforms or software. Website traffic and customer engagement are useful investment metrics.
ROI can be increased by connecting with your target audience. Because your target market is most likely to buy from you, investments that increase your knowledge or engagement with them will likely yield high returns.
Marketing research and targeted ad campaigns are ways to reach your target market.
Don’t be afraid to try new ideas—the market will determine their worth. Start small with experimental tactics to test ROI over a shorter timeframe.
Your ROI decision-making will improve with practice. ROI is one performance metric, but business owners need it to maximize their investments.
Then, Grow your business.