ROI (Return on Investment) is a key performance indicator used to evaluate the profitability or benefits of investments. ROI helps companies determine how effectively resources are spent and whether to continue or stop investing in certain projects or activities.

What is ROI?

ROI measures the relationship between profit and investment costs. A high ROI indicates that investments yield significant profits, while a low ROI suggests insufficient efficiency.

ROI Formula

The basic ROI formula looks like this:

ROI = (Return from Investment - Investment Costs) / Investment Costs * 100%

Explanation:

• Return from Investment – the total revenue or benefit gained from the investment.
• Investment Costs – the total costs of implementing the project or investment.

Example of Calculation

Example 1: A company spent $10,000 on a marketing campaign and gained $15,000 in profit.

ROI = (15,000 - 10,000) / 10,000 * 100% = 50%

This means that the profit from the campaign amounted to 50% of the initial investment.

Example 2: An investment in new equipment cost $20,000, and the profit gained was $25,000.

ROI = (25,000 - 20,000) / 20,000 * 100% = 25%

Alternative ROI Formulas

1. Time-Adjusted ROI:

ROI = (Net Profit / Costs) / Number of Years * 100%

2. ROI for Digital Marketing:

ROI = (Campaign Revenue - Campaign Costs) / Campaign Costs * 100%

Practical Application of ROI

• Marketing Campaign Evaluation – ROI helps analyze the effectiveness of advertising activities.
• Investments in New Products – Determining the profitability of launching new products.
• Equipment or Machinery Purchases – Assessing the benefits of buying new equipment.
• Brand Expansion – Evaluating the efficiency of opening new branches or entering new markets.

Conclusion

ROI is a universal tool for evaluating the effectiveness of investments. Proper use of ROI allows companies to increase profitability and allocate resources efficiently. Understanding and regularly analyzing ROI helps businesses make informed decisions and maximize investment benefits.