What is a Return on Investment?

Ruben Buijs

Founder & Digital Consultant

Written on Aug 1, 2023

2 minutes

Customer Experience

Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment. It measures the return or profit generated from an investment relative to its cost. ROI is commonly used in business and marketing to determine the efficiency and success of various initiatives.


Let's consider two examples to understand how ROI works:

  1. Marketing Campaign: A company invests $10,000 in a marketing campaign and generates $50,000 in additional sales as a direct result. The ROI for this campaign can be calculated by subtracting the initial investment from the total return ($50,000 - $10,000 = $40,000) and dividing it by the initial investment ($40,000 รท $10,000 = 4). This means the ROI for the marketing campaign is 4, or 400%.

  2. Business Expansion: A small business invests $100,000 to open a new location. The new location generates an additional annual profit of $20,000. The ROI for this expansion can be calculated by subtracting the initial investment from the total return ($20,000 - $100,000 = -$80,000) and dividing it by the initial investment (-$80,000 รท $100,000 = -0.8). In this case, the ROI is -0.8, indicating a negative return on investment.


ROI is a vital metric for businesses as it helps assess the profitability and success of investments. Here's why ROI is important:

  1. Decision Making: ROI provides valuable insights when making investment decisions. By comparing the potential returns of different options, businesses can prioritize investments that offer the highest ROI.

  2. Performance Evaluation: ROI allows businesses to evaluate the effectiveness of their strategies and initiatives. It helps identify which investments are delivering the desired results and which may need adjustments or discontinuation.

  3. Resource Allocation: ROI helps allocate resources efficiently. By focusing resources on investments with a high ROI, businesses can optimize their budget and maximize returns.

How to Use Return on Investment

To calculate ROI, follow these simple steps:

  1. Determine the initial investment: Identify the total cost of the investment, including all associated expenses such as equipment, marketing, and labor.

  2. Calculate the return: Measure the profit or return generated by the investment. This could be in the form of increased sales, cost savings, or any other measurable financial gain.

  3. Subtract the initial investment from the return: Subtract the initial investment from the total return to determine the net gain or loss.

  4. Divide the net gain or loss by the initial investment: Divide the net gain or loss by the initial investment and multiply by 100 to express it as a percentage.

Useful Tips

Consider the following tips to make the most out of ROI calculations:

  1. Include all costs: When calculating ROI, make sure to consider all costs associated with the investment, including hidden or indirect expenses. This will provide a more accurate picture of the return.

  2. Use comparable timeframes: To compare different investments, ensure that the time periods for return and initial investment are the same. This will help in making informed decisions.

  3. Consider qualitative factors: While ROI focuses on financial returns, it's essential to consider qualitative factors such as customer satisfaction, brand reputation, and employee morale. These factors may indirectly impact ROI over the long term.


Return on Investment (ROI) is a financial metric used to measure the profitability or return on an investment relative to its cost.
ROI is important for businesses as it helps determine the success or failure of an investment. It allows businesses to make informed decisions about allocating resources and helps measure the effectiveness of their strategies.
ROI is calculated by dividing the gain or profit from an investment by the cost of the investment, then multiplying the result by 100. The formula is: ROI = (Gain from Investment - Cost of Investment) / Cost of Investment * 100
A good ROI varies depending on the industry, the investment type, and the business's goals. Generally, a positive ROI is considered good, but what constitutes a good ROI can differ from one business to another.
Yes, ROI can be negative if the gain from an investment is less than its cost. A negative ROI indicates that the investment has resulted in a loss.
Businesses can improve their ROI by implementing strategies that increase revenue, reduce costs, or both. This can include optimizing marketing campaigns, improving operational efficiency, or diversifying product offerings.
Some limitations of ROI include not accounting for the time value of money, not considering intangible benefits, and not reflecting long-term impacts. It is important to consider other financial metrics alongside ROI for a comprehensive analysis.
ROI is different from profit as it measures the return on an investment relative to its cost, while profit is the amount of money remaining after deducting expenses from revenue. ROI provides a percentage-based evaluation of investment profitability.
Yes, ROI can be used for non-financial investments, such as measuring the return on investment in customer experience initiatives, employee training programs, or sustainability projects. It can help assess the effectiveness and value of these investments.
The frequency of calculating ROI depends on the nature of the investment and the desired level of analysis. ROI can be calculated periodically, such as monthly or quarterly, or for specific projects or campaigns.

Article by

Ruben Buijs

Ruben, the founder of Boei, leverages over a decade of consultancy experience at Ernst & Young to optimize lead generation. Boei specializes in converting website visitors into qualified leads. Outside of work, Ruben is passionate about crossfit and enjoys gaming occasionally.

Table of contents

  1. Examples
  2. Importance
  3. How to Use Return on Investment
  4. Useful Tips
  5. Related Terms

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