ROI is the acronym for “Return on Investment.” It is a metric used to know how much the company earned through its investments. To calculate the ROI it is necessary to raise the total income, subtract the costs from these and, finally, divide that result by the total costs.
ROI is an indicator that allows you to know how much money the company lost or earned with the investments made (in paid advertisements, new tools, training, etc.). In this way, you can know which investments are worthwhile and how to optimize those that are already working so that they have an even better return.
One of the areas that ROI uses the most is marketing or digital marketing, since the Return on Investment allows you to know how much income a previously planned marketing action has generated. In this way, marketing departments can know if the investment made to carry out a certain strategy has been profitable and, therefore, it is worth maintaining it or not.
If the ROI percentage is high it means that we have obtained more profit than the capital of our initial investment, so the investment has turned out to be profitable. On the other hand, if the ROI percentage is negative, it means that we have invested more capital than we have generated profits, so the investment is not profitable. The metric is important because it allows you to evaluate how certain initiatives contribute to the results of the company.
In the same way, based on ROI, it is possible to plan goals based on tangible results and understand whether or not it is worth investing in certain channels.
Why is ROI important?
ROI is an effective indicator when it comes to calculating the return on an action and can be applied to all investments, from those made in marketing campaigns and events, to improvements in the company’s infrastructure, to name a few examples.
When they evaluate your company, investors will also see the ROI, since it is essential to know how much you will earn to know if the investment is worth it.
Being attentive to this indicator also allows the company to plan its goals based on possible results to be achieved, observing previous performances.
You can also identify the time that investments take to bring a return. Also, keep in mind that your company must understand what ROI means to itself and how the metric influences its objectives. Plot realistic metrics and monitor them constantly.
How to calculate ROI (Return On Investment)?
There is a simple formula to calculate ROI, which consists of:
Think that the profit of your company was $ 300,000 and the initial investment was $ 10,000. Using the formula above, we have:
- ROI = (300,000 – 30,000) / 30,000
- ROI = 9
In this illustrative example, the Return on Investment was 9 times the initial investment. You can also multiply the result by 100 to get it as a percentage (in this case, 900% return).