ROI (Return on Investment)

ROI is a critical metric that helps businesses evaluate the financial performance of their investments, guiding strategic decisions to maximise profitability and resource efficiency. ROI helps businesses determine the financial returns generated from investments such as marketing campaigns, new projects, or any other business expenditures.

What does ROI stand for?

ROI is the abbreviation for Return on Investment.

How to calculate ROI?

ROI is calculated by dividing the net profit (or benefit) of an investment by the initial cost of the investment, usually expressed as a percentage. The formula for ROI is:

ROI=(Net Profit/ Investment Cost)×100

What is a good ROI?

A good ROI means an investment has produced substantial returns relative to its cost. While the definition of a "good" ROI varies by industry and context, typically an ROI above 15-20% is considered favorable, indicating significant profitability.

• For instance, if you invest $1,000 in a marketing effort and earn $1,500 in profit, the resulting 50% ROI is generally seen as a strong return.

Moreover, a bad ROI would indicate that the investment made has failed to generate adequate returns compared to its cost, potentially resulting in losses. A ROI below 0% signifies a loss, and even a positive ROI can be seen as poor if it doesn't meet the cost of capital or expected returns.

• For example, if you invest $1,000 in a new venture and only gain $800 in profit, the -20% ROI indicates a loss, marking it as a poor return.

Ultimately, the classification of ROI as good or bad depends on a business’s specific objectives, risk tolerance, and industry standards.

What is ROI in marketing?

Return on Investment, serves several important functions in marketing:

• Evaluate campaigns effectiveness
• Guide budget allocation
• Inform strategies performance
• Justify marketing expenditure to stakeholders
• Enhance decision-makings