Return on investment
Also known as: ROI or return on advertising spend (ROAS)
Return on investment (ROI) shows how much an investment has paid off relative to the cost you incurred for it. The number is usually displayed as a percentage and provides insight into the return. With a positive ROI, the investment returns more than it cost. If the ROI is less than 100%, there is a loss.
How do you calculate ROI?
The standard formula for ROI is:
(return – investment) / investment × 100%
An investment of €2,000 that yields €2,800 results in an ROI of 40%. The result immediately shows how much you’re left with at the end of the day, compared to your initial investment. This calculation is used in virtually every sector to support decision-making or evaluate results.
What is ROI used for?
ROI is used to gain insight into the performance of investments. This applies to advertising budgets, business software, or product development, as well as training programs or real estate. It helps with prioritizing projects, convincing stakeholders, or adjusting policies. In the world of marketing, you often see ROAS (return on advertising spend), a type of ROI that specifically looks at the return on advertising expenditures.
Limitations of ROI
ROI provides a quick and clear picture, but it has its limitations. The calculation does not take time into account. A project that yields a return in one month scores the same as an investment that recoups the same amount over three years. It also does not factor in risks, inflation, or hidden costs. As a result, a high ROI can sometimes be misleading, especially for long-term or complex projects.
