ROI (Return on Investment) is a metric that measures the profitability of investments. It allows you to assess the effectiveness of invested funds and understand whether the investment is paying off. ROI is used in many areas of business, especially in marketing.
To calculate ROI, you need to know the net profit obtained from the investment and the size of the investment itself. Net profit in this case is calculated as the difference between the income and the investment. ROI = (income from investment - investment cost) / investment cost. For example, if the investment is $10,000 and the profit from it is $12,000, then ROI will be: ROI = (12,000 - 10,000) / 10,000 = 0.2. ROI is usually expressed in percentage, so the obtained result should be multiplied by 100% - then we get the investment payoff at the level of 20%. This means that every invested dollar brought a 20% profit.
ROI can be useful in making decisions about where to allocate the company's budget. It shows which investments pay off the best and which ones may be ineffective. For example, if a company invests money in promotion through Google Ads and Facebook Ads, ROI will help determine which advertising channel should receive more money. If the ROI for Facebook Ads is higher, then the company should probably increase its advertising budget specifically on this platform.
However, it should be remembered that ROI does not take into account many factors, such as the duration of promotion, the margin of goods or services, the customer journey, and other variables. ROI should be considered in conjunction with other metrics that help analyze the success of investments.