ROI stands for Return On Investment and is a percentage that is calculated based on the investment and the benefits obtained, to obtain the return on investment ratio.
We are going to explain one of the concepts that we have to take into account when evaluating an investment in a business, both online and offline. It is about ROI, the return on investment, which now -in times of crisis- is even more important, to know if we are spending our money well on new businesses, or making new investment in businesses that we already have running.
The ROI is a value that measures the performance of an investment, to evaluate how efficient is the expense that we are making or that we plan to make. There is a formula that gives us this calculated value based on the investment made and the benefit obtained, or that we plan to obtain.
ROI = (profit obtained – investment) / investment
In other words, we subtract the cost of the investment made from the benefit that we have obtained from an investment (or that we plan to obtain). Then we divide that by the cost of the investment and the result is the ROI.
For example, we have made an investment of 1000 euros and we have obtained 3000 euros. So the ROI would be equal to (3000 – 1000) / 1000 = 2
The ROI value is a ratio, so it is expressed as a percentage. In our example above, we have an ROI of 2%.
To know the percentage of benefits of our investment we can multiply the ROI by 100. That is, with an ROI of 2% we are actually earning 200% of the money invested, or what is the same, for each euro invested we are getting 2 euros (always after deducting the cost of the investment).
ROI is a very simple parameter to calculate to know how positive an investment is. The higher the ROI values, the better. If we have a negative ROI, we are losing money and if we have a ROI very close to zero, we may also think that the investment is not very attractive. When evaluating an investment, it is very useful for us to calculate the ROI, especially to compare two possible investments, because if with one investment we get a better ROI than with another, then we should think about investing our money only in the formula that reports us. better ratios.
ROI can be used for any type of investment. For example, for an advertising investment we can calculate this ratio with the previous formula, to know the economic return of our ads. On the Adwords help page, they give the following:
(Revenues – Costs) / Cost
As they say, suppose that making an investment of 1000 euros in advertising we get 2500 euros in sales on our website. So the ROI would be according to Adwords, (2500 – 1000) / 1000 = 1.5 (we would get 150% of our advertising investment). This value would be useful for us to calculate the effectiveness of a campaign, but an analyst would have also taken into account that to sell 2,500 euros in products you have had to make an investment, not only in Adwords advertising, but also in personnel to process the orders, logistics for shipping and receiving merchandise, etc. Then the real ROI of the campaign would have to be calculated taking into account also our operational cost to obtain that income, as we described at the beginning of the article. For example, if calculating as a percentage, the cost to distribute the orders was 200 euros, the ROI in this case would be (2,500 – 200 – 1,000) / 1,000 = 1.3.
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