What does ROI mean, simple, ROI means Return on Investment.
We’ve all heard that old adage, ‘you’ve got to spend money to make money’. In practice, of course, things aren’t quite so simple. It’s essential to keep a close eye not only on how much you are spending, but also whether your investment is generating losses or gains.
‘Return on Investment (ROI)’ refers to the returns that an investment has generated, relative to how much was actually invested. The result, often shown as a percentage, can be of great help when it comes to assessing the success of a new initiative, judging the profitability of specific marketing schemes, and much more. The flexibility of the statistic has made it a valuable tool for users such as investors, business analysts, marketers and others.
How to work out ROI
There are a number of different ways to calculate ROI. One of the most common is:
‘ROI = 100(Net profit/ Cost of investment).
As an example, let’s say that a company invests $800 in advertising and manages to generate $1200 as a result. In this case, the calculation would be:
100 x ((1200-800)/800) = 100 x (400/800) = 100 x 0.5 = 50%.
However, with most companies and organizations, generating returns is about far more than just one area of investment. In addition to advertising, the company in the above example may also invest in web development, additional support training, PR initiatives, and so on.
Because of this, in addition to the $800 spent on advertising, the company would also need to take other expenditures into account. Once the calculations were adjusted, the returns would likely be a lot less impressive than 50%.
In most cases, simple ROI calculations with fewer factors are used for small or personal investments, such as stocks or home improvements. Be sure to always take as many relevant factors into account as possible – when it comes to investing, the last thing you want is to give yourself false optimism.
Naturally, improving your ROIs should be at the top of your agenda, but how is this done? The first thing to keep in mind is that because of how flexible ROI calculations can be, the numbers can often be easily manipulated. Because of this, users calculating ROIs as part of the same organization will typically use the same formulae. Needless to say, boosting your ROIs simply by fudging the numbers won’t get you very far.
The next thing to remember is the importance of time. When comparing the ROIs for different investments, make sure that you are collecting and comparing the same metrics, or else your interpretation of the results may be incorrect. An ROI of 30% looks a lot less impressive over 5 years than three, and so on.
Finally, keep in mind that more specific information will also be available if necessary. ROIs can be altered or contextualized based on additional factors, such as tax rates, projected earnings, inflation, the changing value of company assets, and more.