ROI stands for Return on investment, also referred to as return on costs.
ROI is a ratio between net income and expenditure. As a metric of performance, it evaluates if a certain investment was efficient and profitable. ROI is also a reasonable measure to compare the effectiveness of separate investments or campaigns.
A higher ROI means the benefits are favorably exceeding expense costs. A low ROI indicates an expenditure is not meeting the expected returns goals. A negative ROI means the investment lost money.
ROI is used by businesses, investors, and start-ups as a key performance indicator (KPI), to determine the profitability of an expense or investment. It is the perfect metric to define how much the profit is exceeding the cost of expenditures.
Return on investment is regularly measured on a yearly basis. However, it could be calculated for a shorter period of time when it comes to short-term expenditures such as online advertisements.
To calculate ROI, divide the investment benefit by the expenditure costs.
Use the standard Return on investment (ROI) formula:
profit earned / investment cost = ROI
Multiply the result by 100 to get the relevant percentage.
For example, if you have an investment profit of $200 and a cost of $100, the ROI would be 2. In percentage, that is 200% return on costs.
ROI is important to determine investment profitability. By calculating ROI, brands and enterprises have a better understanding of how well the business is doing.
The Return on investment metric also helps determine what areas of the business need improvement and what type of expenditures would bring the most profits.
There is no defined formula or unified target for ROI in marketing. In the advertising field, it is commonly considered that a good ROI for ads is between 25% and 50%, or more.
For social media promotions, the average conversion rate and ROI are a bit lower - between 9 and 10%. Especially when running ads that charge per impression.
When it comes to ad campaigns, Return on investment is driven by strategy. Without a strategy, running ads is just a shot in the dark, that could lead to a waste of budget and no results.
A winning advertising strategy unites goals, budget, tactics, and target, and needs to be drafted, reviewed, and discussed before running a campaign. As well as reviewed and revised after.
Most business advisors encourage small companies to look for an ROI between 10-30%.