What is ROI? (Return On Investment)

What is Return on Investment (ROI)?

The money an investor in a business earns for injecting financial resources is known as return on investment, or ROI. Any return is derived from the company’s net profit and is a measure of the venture’s efficiency in terms of capital investment.

Calculating ROI

The simplest way to calculate ROI is to describe it as a percentage of the initial capital total, gain or loss. The ROI is calculated by subtracting the ‘cost of the investment’ from the ‘total gain on the investment’ and dividing the result by the ‘cost of the investment.’ For example, if an advertiser invests £500 in  radio advertising and receives £600 in return at the end of the campaign, the ROI is:

(£600 – £500) / £500

So, the ROI = 20%

Return on Investment and Its Applications

Once determined, the Return on Investment statistic can be used by both the advertiser and the vendor. When looking for areas to deposit their money, it will tell the investor the possible ROI on investment. They can evaluate where their money will get the best return by comparing the ROI of a clothing business to that of, say, a shoe retailer. When a store goes to the market to find investors, it may use the ROI statistic. The store owner makes the business enticing to invest in by demonstrating that an investor can earn 20% over the period of the money in the store.

NOTE: Keep in mind timeframes can affect ROI and should be considered. A 20% ROI on a 3 month advertisement is not necessarily a better option than a 10% ROI on a 1 month advertisement.

Return on Investment (ROI) tracking

It’s often challenging to keep track of your return on investment. Offline advertising campaigns can produce incredible results, but how can you track how many impressions a poster or billboard generates, and, more crucially, how many sales the advertisement generates?

Click rates are easily tracked when directing customers to your site and items using digital advertising, but they do not measure conversion rate, which is the crucial data used to analyse ROI.

To discover more on how to measure the success and ROI of your advertising campaign, read our article on Measuring Advertising.