ROI (return on investment)

ROI answers a simple question: for every unit of money spent, how much came back on top. An ROI of 50% means the investment returned its cost plus half again. An ROI of 0% means it broke even, and a negative ROI means it lost money.

ROI is not the same as return on ad spend (ROAS), which is revenue divided by ad spend. ROAS uses revenue and ignores other costs, so a campaign can show a healthy ROAS while losing money once product costs, fees and staff time are counted. ROI, done properly, uses profit.

How it works

The formula is ROI = (gain − cost) ÷ cost × 100. Suppose a new website costs 6,000 in total and, over the following year, brings extra jobs that produce 15,000 in gross profit. The gain is 15,000, so ROI = (15,000 − 6,000) ÷ 6,000 × 100 = 150%. The investment returned its cost and one and a half times as much again.

The hard part is the inputs, not the arithmetic. Cost should include everything spent: fees, software, ads, and the time of staff who worked on it. Gain should be the profit that the investment actually caused, not total revenue, and not sales that would have happened anyway. That second point is where many ROI figures go wrong, because attribution is approximate.

Time also matters. ROI says nothing about how long the return took, so a 100% return in three months and the same return over five years look identical. State the period with every ROI figure. To check an ROI claim, yours or a supplier's, ask what was counted as cost, whether gain means revenue or profit, what period it covers and how the business knows the investment caused the result.

Example

A café spends 1,200 on a three-month local ad campaign promoting a new breakfast menu. It tracks redemptions of a code shown only in the ads: 400 breakfasts with an average spend of 12, which is 4,800 in revenue. Food and staff costs for those breakfasts are about 60% of the price, so the gross profit is 1,920.

ROI = (1,920 − 1,200) ÷ 1,200 × 100 = 60%. The ROAS, 4,800 ÷ 1,200 = 4, looks more impressive but ignores food and staff costs. The owner also notes that some of those customers might have come anyway, so the true ROI is probably somewhat lower, and that new regulars may keep coming after the campaign, which this calculation does not count.

Why it matters for your business

ROI lets you compare very different investments, such as an ad campaign, a new booking system and an extra staff member, in one common measure. It encourages you to count all costs and to look for real profit rather than activity. Its weaknesses are easy to exploit: by choosing which costs to include, which gains to claim and which period to cover, almost any project can be made to look good. Use it with consistent rules, and combine it with customer lifetime value where returns build over years. For small decisions a rough ROI is enough, but for large ones write down the assumptions behind it so you can check them later against what actually happened.

Common mistakes

• Using revenue instead of profit as the gain, which overstates ROI.
• Leaving out costs such as staff time, software subscriptions or agency fees.
• Quoting ROI without the time period it covers.
• Crediting the investment with sales that would have happened without it.

Questions people ask

How do I calculate ROI?

Subtract the total cost of the investment from the gain it produced, divide the result by the cost and multiply by 100. If a project cost 2,000 and produced 3,000 in gross profit, ROI is (3,000 minus 2,000) divided by 2,000, times 100, which is 50%.

What is the difference between ROI and ROAS?

ROAS is revenue from ads divided by ad spend, so it shows how much revenue each unit of ad money brought in. ROI subtracts costs and uses profit, so it shows whether the investment actually made money. A campaign can have a strong ROAS and still have a negative ROI.

What is a good ROI for marketing?

Any ROI above zero means the investment made more than it cost, but whether it is good depends on your margins, the risk involved and what else you could have done with the money. Compare it with your other options and with your own past campaigns measured the same way.