Definition:
The acronym ROI stands for Return On Investment, a formula used to obtain real or perceived future value from an expense or investment. It is a measure of the profits obtained in each investment
Return on Investment is a measure of profitability that indicates whether a company is using its resources in an efficient manner. For example, if a company’s long-term return on investment is less than its cost of capital, then the company will improve by liquidating its assets and depositing the funds in a bank.
What is ROI used for
Return on Investment has become popular in recent decades as a general metric for evaluating capital acquisitions, projects, programs and initiatives, as well as traditional financial investments in securities or the use of venture capital. Metrics are frequently used for such purposes, but decision makers and analysts should be aware that the return on investment figures is often produced and used by those with a misunderstanding of the metric’s strengths, weaknesses, and unique input data needs.
How to calculate ROI
Like the “return” (or profit) earned on a portfolio or bank account, the Return on Investment is calculated as a percentage.
In simple terms, the ROI formula is:
(Return – Investment) / Investment
The ROI calculations of marketing campaigns can be complex, since you can have many variables both on the profit side and on the investment or cost side. But understanding the formula is essential, totally necessary to produce the best possible results with marketing investments.