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How to Calculate ROI to Justify a Project

• 12 May 2020

Understanding how to calculate the potential return on investment (ROI) of a project is an essential financial skill for all professionals to develop.

If you’re an employee, knowing how to calculate ROI can help you make the case for a project you’re interested in pursuing and have taken the lead on proposing. If you’re a manager, understanding ROI can give you greater insight into your team's performance . If you’re an executive, working knowledge of ROI can make it easier for you to identify which projects should be greenlit and which should be passed over. Once ROI is proven, it may be possible to replicate success by applying lessons learned from the first project to other segments of the business.

If you’re unfamiliar with accounting and finance , the prospect of determining the ROI of a project may seem beyond your abilities. However, it’s not an overly complicated process. By understanding the basics of financial valuation, which can enable you to put a monetary value on companies, projects, or anything that produces cash flows, anyone can learn to calculate the ROI of a project.

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What Is Return on Investment?

Return on investment (ROI) is a metric used to denote how much profit has been generated from an investment that’s been made. In the case of a business, return on investment comes in two primary forms, depending on when it’s calculated: anticipated ROI and actual ROI.

Anticipated vs. Actual ROI

Anticipated ROI , or expected ROI, is calculated before a project kicks off, and is often used to determine if that project makes sense to pursue. Anticipated ROI uses estimated costs, revenues, and other assumptions to determine how much profit a project is likely to generate.

Often, this figure will be run under a number of different scenarios to determine the range of possible outcomes. These numbers are then used to understand risk and, ultimately, decide whether an initiative should move forward.

Actual ROI is the true return on investment generated from a project. This number is typically calculated after a project has concluded, and uses final costs and revenues to determine how much profit a project produced compared to what was estimated.

Positive vs. Negative ROI

When a project yields a positive return on investment , it can be considered profitable, because it yielded more in revenue than it cost to pursue. If, on the other hand, the project yields a negative return on investment , it means the project cost more to pursue than it generated in revenue. If the project breaks even, then it means the total revenue generated by the project matched the expenses.

Return on Investment Formula

Return on investment is typically calculated by taking the actual or estimated income from a project and subtracting the actual or estimated costs. That number is the total profit that a project has generated, or is expected to generate. That number is then divided by the costs.

The formula for ROI is typically written as:

ROI = (Net Profit / Cost of Investment) x 100

In project management, the formula is written similarly, but with slightly different terms:

ROI = [(Financial Value - Project Cost) / Project Cost] x 100

Check out our video on return on investment below, and subscribe to our YouTube channel for more explainer content!

Calculating the ROI of a Project: An Example

Imagine that you have the opportunity to purchase 1,000 bars of chocolate for $2 apiece. You would then sell the chocolate to a grocery store for $3 per piece. In addition to the cost of purchasing the chocolate, you need to pay $100 in transportation costs.

To decide whether this would be profitable, you would first tally your total expenses and your total expected revenues.

Expected Revenues = 1,000 x $3 = $3,000

Total Expenses = (1,000 x $2) + $100 = $2,100

You would then subtract the expenses from your expected revenue to determine the net profit.

Net Profit = $3,000 - $2,100 = $900

To calculate the expected return on investment, you would divide the net profit by the cost of the investment, and multiply that number by 100.

ROI = ($900 / $2,100) x 100 = 42.9%

By running this calculation, you can see the project will yield a positive return on investment, so long as factors remain as predicted. Therefore, it’s a sound financial decision. If the endeavor yielded a negative ROI, or an ROI that was so low it didn’t justify the amount of work involved, you would know to avoid it moving forward.

It’s important to note that this example calculates an anticipated ROI for your project. If any of the factors affecting expenses or revenue were to change during implementation, your actual ROI could be different.

For example, imagine that you have already purchased your chocolate bars for the agreed-upon $2 apiece and paid $100 to transport them. If the most that the store will pay you is $2.25 per chocolate bar, then your actual revenues drop substantially compared to your projected revenues. The result is a reduced net profit and a reduced actual ROI.

Actual Revenues = 1,000 x $2.25 = $2,250

Net Profit = $2,250 - $2,100 = $150

ROI = ($150 / $2,100) x 100 = 7.14%

Circumstances are rarely as straightforward as this example. There are typically additional costs that should be accounted for, such as overhead and taxes. In addition, there’s always the possibility that an anticipated ROI will not be met due to unforeseen circumstances, but the same general principles hold true.

How to Use Finance to Pitch Your Project

Have you ever pitched a project to senior management, only to have the idea shot down under the guise of “not making financial sense?" It happens more often than you might think. By learning how to calculate ROI for projects you’re interested in pursuing, you can self-evaluate them before they're raised up to decision-makers within your organization and defend them as they’re being considered.

Similarly, by understanding how to calculate ROI after a project you’ve spearhead is done, you can better speak to the contributions that you and your team have made toward shared company goals.

High-performing businesses are successful because they make smart decisions about when and where they allocate available resources. Calculating the ROI of a project before it moves forward can help ensure that you’re making the best possible use of the resources you have available.

To learn more ways that you can use financial concepts to improve your efficacy and advance your career, explore our online finance and accounting courses . Download your free flowchart to determine which is right for you.

About the Author

How to Calculate Return on Investment (ROI)

Arlene Soto

1 min. read

Updated October 25, 2023

Return on investment (ROI) is a financial concept that measures the profitability of an investment.  There are several methods to determine ROI, but the most common is to divide net profit by total assets.  For instance, if your net profit is $50,000, and your total assets are $200,000, your ROI would be 25 percent. A common definition of ROI is “a profitability measure that evaluates the performance of a business by dividing net profit by net worth.”

In a small business, the uses of ROI could be to measure the performance of pricing policies, an investment in capital equipment, or an inventory investment.  When purchasing assets in a business, such as inventory or equipment, you expect to get a financial benefit from the purchase.  Return on investment is a tool to help decide between purchase alternatives that will either generate revenue or result in cost savings that benefit the net income of the business.  Investors will also look at return on investment when choosing whether to fund a business venture.

Return on investment may also be measured unconventionally, such as in terms of social responsibility or environmental and societal benefits.  This is more difficult to measure—in determining the social return on investment, the payback would need to be quantified to calculate the cost versus the benefit.  A  network of practitioners  was formed in 2006 to facilitate the evolution of calculating social return on investment.

While return on investment is a useful tool to look at profitability, calculations are complicated by other factors such as time, maintenance costs, financing costs, other investment considerations, and the overall goals of the company.  For instance, with the purchase of capital equipment, it is expected that equipment will provide a benefit to the company for several years. As such, the net income will need to be estimated for future time periods to determine the overall ROI.  Additionally, maintenance costs over the life of the equipment will reduce the overall ROI.  An accountant can assist with the formulas to determine more complex ROI calculations.

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Arlene Soto is the director of the Small Business Development Center at Tillamook Bay Community College. She is the former director the Southwestern Oregon Community College Small Business Development Center Director. She is responsible for outreach to Coos, Curry and Western Douglas Counties in Oregon to provide small business development services through free, confidential business advising and low-cost training programs. Arlene has been working with businesses in the accounting field since 1976 and in management since 1988. She is a Certified Management Accountant and a NASBITE Certified Global Business Professional with a Master’s degree in Management from Marylhurst University and a Bachelor’s degree in accounting from Portland State University.

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ROI Calculator - Return on Investment

What is roi, roi formula, examples of roi calculation, return on investment calculator, roi and financial decisions, roe vs. roi, advantages and disadvantages of roi, investing recommendations for better roi, additional information and further calculators.

ROI calculator is a kind of investment calculator that enables you to estimate the profit or loss on your investment. Our return on investment calculator can also be used to compare the efficiency of a few investments. Thus, you will find the ROI formula helpful when you are going to make a financial decision. If you know how to calculate ROI, it's easier to foresee the results of an investment.

In the following part of the article you will find answers for the following questions:

• What is ROI formula?
• How to calculate ROI?
• What is a difference between ROE vs. ROI?
• How can you use ROI in making wise financial decisions?
• What are the advantages and disadvantages of ROI?

And last but not least, in the text below, you will find out how to use our return on investment calculator to make your calculations (and thus financial decisions) even faster and smarter.

First of all, you need to know that ROI is an abbreviation of return on investment . By definition, ROI is a ratio between the net gain and the net cost of an investment . In other words, ROI compares the net income from an investment to the net expenses required to finance that investment. Customarily, ROI is presented in the form of percentage points . Thus, when a calculation returns a result of ROI = 0.1 , the financial analysts report it as ROI = 10% .

Alongside other simple measures of profitability (NPV, IRR, payback period), ROI is one of the most frequently used methods of evaluating the economic consequences of an investment. Undoubtedly, its main advantage is its simplicity – ROI can be easily applied to measure investment profitability, as it is based on easily available data, and its value is clear to understand and interpret. Moreover, as ROI is calculated as a percentage, it's easy to compare the results of many different investments. Consequently, you are able to choose the most beneficial one, all thanks to ROI.

Before we move on and discuss ROI in greater detail, it is worth mentioning that in finance, several different measures may be called return on investment. For example, you can say ROI when referring to Return on Invested Capital (ROIC), Average Rate of Return, Return on Equity, or Earnings per Share. However, the best known and probably the most commonly used measure is known as simple return of investment , henceforth referred to as return on investment (ROI).

By the way, it is worth mentioning that due to the terminology confusion, when you use the ROI measure in real-life decisions, it is a good idea to know precisely how it has been computed. We also believe that this is one more reason to read our article carefully from top to bottom.

Investors can't estimate the efficiency of their investments without understanding how to calculate ROI. That's why the ROI formula plays a crucial role in investment decisions.

The ROI formula is based on two pieces of information - the gain from investment and the cost of investment. The equation that allows calculating ROI is as follows:

ROI = ( G – C ) / C

• G - gain from investment
• C - cost of investment

Note here that the ROI equation doesn't take into consideration any risks associated with the investment. It is one of the biggest limitations of ROI (for more, see the section advantages and disadvantages of ROI ).

Do you want to understand the ROI equation? Are you curious about how to calculate the ROI in practice? Or maybe you want to know how to interpret the results of an ROI calculation?

We have prepared a few examples to help you find answers to these questions. After studying them carefully, you shouldn't have any trouble with understanding the concept of ROI measure. You will also be capable of making smart financial decisions on the basis of ROI metrics.

As an investor in the real estate market, you purchase a property in New York for $600,000. Three years later, you sell this property for $900,000.

To calculate return on investment, you should use the ROI formula:

ROI = ($900,000 – $600,000) / ($600,000) × 100% = 0.5 × 100% = 50%

So the return on your investment for the property is 50%.

As a marketing manager in a large international company, you introduce a new marketing program with a budget of $250,000. The result of this program is a $200,000 growth in profits over each of the following two years. First of all, note that your total gain from this investment is the gain from the first year plus the gain from the second year.

So: G = $200,000 + $200,000 = $400,000 .

Then, you can use the ROI formula:

ROI = ($400,000 – $250,000) / ($250,000) × 100% = 0.6 × 100% = 60%

The ROI of the marketing program is 60%.

You are an investor in a stock exchange. In January, you bought 150 shares of the company Alpha. The purchase price was $12.67 per share. The total value of the transaction was then: 150 x $12.67 = $1,900.50 . After nine months, thanks to the favorable economic conditions, the stock price rose to $15.23, and you decided to sell them (the value of the transaction was: $15.23 × 150 = $2,284.50.

The ROI of this investment is:

ROI = ($2,284.50 – $1,900.50) / ($1,900.50) × 100%= ($384) / ($1,900.50) × 100% = 0.2021 × 100% = 20.21%

A ROI of 20.21% means that your investment turned out to be profitable. However, if instead of rising, let's see what would happen if the price of Alpha had plunged. Let's assume that the final stock price was $9.14. In this case:

ROI = ($1,371 – $1,900.50) / ($1,900.50) × 100%= (-$529.50) / ($1,900.50) × 100% = -0.2786 × 100% = -27.86%

This time, the outcome of your investment is far from profitable.

The numbers given in the examples in the previous paragraph are rather simple, the number used in real business investments tend to be a bit more complicated. If we deal with much larger amounts of money or with more complex numbers, it's far more comfortable to use our return on investment calculator. Although the ROI calculator bases its calculation on the same formula, the usage of it is much faster and easier. With our tool, it's enough only to type the invested amount and the returned amount to get your estimated ROI.

Return on investment calculator is a tool for everyone who has got a business or is planning to set one up. This is also highly recommended for any investors, from shopkeepers to stockbrokers.

Are you curious how to use our return on investment calculator? Obtaining the value of ROI with our smart return on investment calculator is easier than you thought. To assess the profitability of your investment within a few seconds, you don't need to memorize the ROI formula or perform any computations, all you need to do is to fill the appropriate fields in our calculator:

• invested amount – the amount of money you are going to invest (or you have already invested)
• returned amount – the total amount of money you are planning to receive (or you have already received) after the closing of the investment.

That's it! In an instant, our return on investment calculator makes all necessary computations and gives the results. They are shown in a field ROI where you could see the value of ROI as a percentage. Did you know that you can also use the return on investment calculator the other way round? Plug in the initial principal ( invested amount ) and the percentage of estimated profit ( ROI ) to find out what amount of money you can expect to earn.

In conclusion, our ROI calculator can help you make the most beneficial financial decision for you, completing many different cost-benefit analysis's in no time. Moreover, with the mobile version of our return on investment calculator you are able to compute ROI whenever and wherever you want.

Return on investment is a useful measure to estimate the surplus of net investment benefit on an accrual basis. ROI can also be used in making rational financial decisions. As a simple method, ROI is used primarily as an auxiliary at the initial stage of assessment of the investment project.

In general, the decision criterion is defined in the following way:

• ROI ≥ LV – investment is profitable
• ROI < LV – investment is unprofitable

Where LV is a predefined limit value.

In the simplest case (investor has a capital to invest and has only one investment alternative), the decision criterion is formulated as follows:

• ROI ≥ 0 – investment is profitable
• ROI < 0 – investment is unprofitable

In real life investments, a limit value for ROI analysis may be set on a particular level which is different than zero. For example, you can set a return on investment in your branch of industry (ROIb) as a limit value. Then the absolute decision criterion is:

• ROI ≥ ROIb – investment is profitable (acceptable)
• ROI < ROIb – investment is unprofitable (not acceptable)

In a professional application, financial analysts and decision-makers usually use weighted average cost of capital (WACC) as a limit value. In this case, the decision criterion is:

• ROI ≥ WACC – investment is profitable (acceptable)
• ROI < WACC – investment is unprofitable (not acceptable)

As return on investment (ROI) is sometimes confused with return on equity (ROE), it is worth briefly discussing the similarities and differences between them.

Firstly, both ROI and ROE are simple methods of an absolute evaluation of investment profitability. The characteristic feature of ROI and ROE is that they are single-periods methods, and they do not have the same value for the entire duration of the investment. Moreover, both of these indicators do not include any risk measure. In addition, neither ROI nor ROE takes TVM (which you can read more about in our time value of money calculator ) into account.

The main difference between ROI and ROE is that the former takes into account the total expenditure on investments (this is own capital and debt), whereas the formula of the latter includes only own capital.

The main advantages of ROI are as follows:

• Obtaining the value of ROI does not require complicated calculations (especially with our ROI calculator). On the contrary, it is simple and easy.
• The results of calculations are easy to interpret and compare with other investments.
• The data necessary to perform calculations is easy to obtain. In fact, you only require two figures to obtain the ROI - gain from investment and cost of investment.

On the other hand, the most notable limitations of ROI are:

The ROI formula does not take into consideration the changes in the value of money over time (formally, we say that the ROI disregards the factor of time). This leads to the conclusion that a higher value of ROI does not always mean the investment option is better than another.

Let's consider two alternative investments with the same ROI of 20%. Investment A last one year, and investment B – four years. You will get the profit from investment A within one year. You need three additional years to get the same gain from investment B. Undoubtedly, despite the same values of ROI, investment A is better than B.

To conclude: If you want to compare two investment options with ROI, you must make sure that ROI calculations are performed over the same time period.

The determination of the LV (limit value) is not objective and thus may bias the result of analysis and lead to improper decisions.

Return on investment may be susceptible to manipulation. It is because you can use different approaches to measure gain from investment and cost of investment.

Results obtained from ROI calculations are valid and comparable only if the considered gains and costs are related to the undertaken investment, and are not effects of other causes.

In the stock market if you are sure of your investment, you can try to reduce your average cost per share. Then, any posterior return to the investment will be higher because it would be compared to a smaller investment cost.

In the stock market, look for companies with high Earnings per share growth. Specifically, you should look for companies that are reporting over 10% EPS CAGR, those ones are the most likely to give you high ROI if they sustain such earnings growth.

In the stock market, you also have to consider your company operating efficiency. One way of doing that is to measure the EBITDA margin. Remember you should look for EBITDA margin positive and growing. That indicates a company that is doing better and better over time and might give you a considerable ROI in the near future.

Consider tracking your portfolio beta from time to time. The beta of your portfolio indicates how much extra/less risk you have compared to the broad market. Is the risk you can diversify through diversification. For higher ROIs, a higher portfolio beta is recommended. However, you should also be prepared for larger drawdowns.

Another great source of extra income for boosting your ROI is to consider stock options. There are two types of options: calls and puts. With each of them you can make more money in case the market keeps increasing or crash. If you are more into limited risk but still want the extra profit, check out the bull call spread strategy.

Return on investment is a very popular measure because of its simplicity and usefulness. Now that you know how to calculate ROI, it's high time you found other applications which will help you make the right choices when investing your money. We are sure that the ROI equation is not the only thing you should be familiar with to make smart financial decisions.

• If you are trying to decide what ROI you will get when investing time and money into building a software tool, check out the build vs. buy calculator .
• If you want to estimate the average yearly gain from your investment, you should use the CAGR calculator .
• If you are involved in a trade, you may also need the profit margin calculator , which lets you calculate every variable in the sales process.

How to calculate the ROI percentage?

To calculate the ROI percentage, follow the given instructions:

Find out the initial and final value of the investment.

Subtract the initial value of the investment from the final value .

Divide the result from Step 2 by the initial value of the investment and multiply the result by 100 .

Congrats! You have calculated the ROI percentage.

How to calculate the ROI on real estate investment?

To calculate the ROI on a real estate investment, proceed as follows:

Subtract the property's purchase price from its selling price .

Divide the result from Step 1 by the purchase price .

Multiply the result by 100 to get the ROI on real estate investment.

If the net gain on an investment is $1200 and the investment cost is $2000, what is the ROI?

0.6 or 60% . The formula for calculating ROI is ROI = Net gain / Cost of investment . Using the values $1200 and $2000 in the formula we will get: ROI = $1200 / $2000 = 0.6 or 60%.

What does 30% ROI mean?

An ROI (return on investment) of 30% means that the profit or gain from an investment is 30% . For example, if the investment cost is $100, the return from investment is $130 - a profit of $30.

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Calculating the return on investment for your business

It's impossible for your business to flourish if you don't invest in its growth. However, it can be hard to determine whether investments will be worth it in the long run. For business owners looking to make smarter financial decisions, this guide outlines everything you need to know about calculating your return on investment (ROI). We cover the difference between a standard and an annualised return rate, run you through the calculations step by step, show you how to interpret the results before addressing the formulas various pros and cons. We conclude by mentioning Kriya's offerings and answering some frequently asked questions.

Whether you're looking to hire new staff or move to bigger premises, if you're a small business on the rise, it's likely you're making a lot of investments. As critical as these expenditures can be, sometimes it's hard to know if you're getting your money's worth. This is where the return on investment, or ROI, comes in.

ROI is one of the best metrics for monitoring your businesses performance. Since its inception in 1914, the formula has helped business owners all around the globe make smarter financial decisions. Specifically, it’s helped individuals and companies take the guesswork out of financing by measuring their return on a potential investment.

Despite its clear benefits, however, many entrepreneurs are yet to familiarise themselves with the formula. Therefore, to clear up any potential confusion, this guide covers everything you need to know about calculating your return on investments. Specifically, we show you how to calculate your basic and annualised ROI and how to interpret the results before outlining the various pros and cons associated with its use.

Before we address its uses, however, what exactly do we mean when we talk about ROI?

WHAT IS A RETURN ON INVESTMENT (ROI)?

In simple terms, ROI is a financial metric that measures the return on an investment relative to its cost. It helps companies and individuals to compare the efficiency of different investments, so they're able to understand if the rewards will outweigh the risks.

Generally speaking, the lower the cost of investment and the higher the net profit, the more positive the ROI. Subsequently, the higher the percentage, the more favourable an investment is likely to be.

The metric is used widely because it’s relatively easy to calculate and can be applied to any type of business or personal investment. It’s specifically popular in the field of marketing because it helps leaders work out if their marketing campaigns are worth investing in.

WHAT’S THE BASIC FORMULA?

The formula for calculating your basic ROI is as follows:

• ROI = 100% * net profit / cost of investment

HOW TO CALCULATE YOUR RETURN ON INVESTMENT (ROI)

Working out your ROI is a relatively straightforward process, especially for small businesses. This means you should be able to analyse your investments in-house without the help of external financial advisors. Depending on the end goal of your calculation, a return on investment can be measured in a number of different ways. However, the formula we've listed above is the most commonly used ratio.

To work out the ROI of a particular expenditure, you can follow the following steps.

1. Determine your net profit from the investment

The net profit represents the total amount of money gained from your investment. In other words, it’s the benefit you and your business will receive if you go through with the -. To work out this figure, you simply deduct the total expenses of the investment from the total revenue.

2. Calculate the cost of investment

Once you’ve established your net profit, it’s time to work out the cost of your investment. To calculate this figure, you simply add the fixed cost of your expenditure to its variable costs. This will provide you with your total cost of investment.

3. Divide the net profit by the cost of investment

In line with the ROI formula, next, you need to divide your net profit figure by the total cost of your investment.

4. Multiply this figure by 100%

Finally, you multiply this decimal number by 100, and you will have your final ROI ratio in the form of a percentage.

WHAT’S AN ANNUALISED RETURN ON INVESTMENT (ROI)?

While the basic ROI formula is the most effective way to measure your immediate returns, it doesn't consider the holding period of the investment. Therefore, if you're looking to analyse your returns over a specific length of time, it may be more appropriate to work out your annualised return.

As the name suggests, an annualised ROI represents the average of an investment's earnings over a year. It's expressed as a time-weighted annual percentage, and types of returns can include capital, interest payments and dividends. The calculation also includes adjustments for compounding interest, so many experts believe it is more accurate than the basic formula.

WHAT IS THE ANNUALISED RATE OF RETURN FORMULA?

The annualised rate of return formula is as follows:

• The annualised rate of return = ( ending value of investment/beginning value of investment) x 100

How to calculate your annualised return

To work out your annualised ROI, you follow the steps below.

1. Determine your beginning value

Your beginning value represents how much your investment portfolio was worth before the capital changed hands. In simpler terms, it’s how much money you put into an investment.

2. Calculate your ending value

Once you’ve established your beginning value, it’s time to work out your ending value. Your ending value is how much you stand to gain from the investment over the period of your annualised return. As stated above, aside from the basic amount of capital, this figure should also include interest payments and dividends.

3. Work out your annualised return

Once you have both of these figures at hand, you can calculate your final annualised return. To do so, you need to divide your ending value by your beginning value before multiplying this number by 100. This will provide you with your final annualised ROI ratio.

HOW TO INTERPRET YOUR ROI

There isn’t much point in calculating your investments basic or annualised ROI if you can’t make sense of the end result. Luckily, interpreting your return is pretty simple: the higher your basic or annualised ROI is, the more fruitful your investment is likely to be.

Since the nature of each investment differs so heavily, there is no benchmark of what a ‘good’ or ‘bad’ ROI ratio is. There are, however, other ways you can interpret your results. By researching other small businesses in your industry and recording the average ROI on their investments, you can gauge what a standard return may look like for a company similar to yours.

You can then compare your results against this figure to establish your business’s performance. You should, however, understand that this comparison will only give you a rough indication of your ROI’s value.

WHY ARE THESE FORMULAS SO IMPORTANT?

By now, you should understand the basics of the standard and annualised ROI formulas. If you are new to the world of profitability ratios, below we explain why they are such a valuable tool for businesses.

They help you to determine profitability

When people invest, they are looking to get more out than they put in. However, due to a whole host of variables, business owners can’t guarantee that this risk will pay off. By calculating the ROI of an investment before they split with their cash, they can calculate its rough profitability. This lowers their chance of encountering negative returns.

They help you to understand risks

Every financial investment involves some degree of risk, and it’s the role of business owners to manage these risks as much as possible. Fortunately, by using the ROI metric, you’re able to avoid risky investments and make the smartest decisions possible for the future of your business.

They are simple to use

Finally, another reason ROI formulas are beneficial is because they're so easy to use. If you're calculating your basic or annual returns, all you need are two key figures. Compared to other financial metrics; these formulas are extremely straightforward. Therefore, it's unsurprising that they're such a staple for business owners trying to manage their finances.

WHAT ARE THEIR LIMITATIONS?

Despite the clear advantages of these formulas, however, they’re far from perfect. To give you a more balanced view of the metrics, here are some limitations to their use.

They aren’t 100% accurate

Return formulas aren’t able to provide accurate financial projections because the formula is based on too many variables. They instead give companies and individuals a rough estimate of their profitability. With this in mind, to avoid getting caught out, business owners shouldn’t base crucial business decisions on these results.

The basic formula doesn’t account for time

As we’ve already addressed, the standard ROI formula only considers the immediate outcome of an investment. This makes it hard to predict how an investment will pay off later down the line. Fortunately, if you’re looking to understand your investments return over a 12 month period, you can use the annualised ROI formula.

Results can be inconsistent

While the standard ROI metric is the most popular way to calculate returns, many other formulas exist. And since every formula generates slightly different results, it’s impossible to obtain an objective measure of your ROI. Because of this, investors should always stick to the basic formula when possible and check which formula was used when comparing the results of other companies.

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FREQUENTLY ASKED QUESTIONS (FAQS)

What is a return on investment (ROI)?

ROI is a financial metric that measures the return on an investment relative to its cost. It helps companies and individuals to compare the efficiency of different investments, so they're able to understand if the rewards will outweigh the risks. Generally speaking, the lower the cost of investment and the higher the net profit, the more positive the ROI.

How do you calculate your return on a business investment?

The basic ROI formula is ‘ROI = 100% * net profit/cost of investment'. In accordance with this formula, to calculate the ROI, you need to determine your investment's net profit and its total cost. Then, you divide the net profit by the total cost and multiply this result by 100. The figure you are left with is your final ROI ratio.

What is an annualised rate of return?

An annualised ROI represents the average of an investment's earnings over a year. It's expressed as a time-weighted annual percentage, and types of returns can include capital, interest payments and dividends. The calculation also includes adjustments for compounding interest, so many experts believe it is more accurate than the basic formula.

How does a business analyse its ROI ratio?

Since the nature of each investment differs so heavily, there is no benchmark of what a ‘good’ or ‘bad’ ROI ratio is. There are, however, other ways you can interpret your results. By researching other small businesses in your industry and recording the average ROI on their investments, you can gauge what a standard return may look like for a company similar to yours. You can then compare your results against this figure to establish your business’s performance.

What are the benefits of the return on investment (ROI) metric?

Return on investment (ROI) formulas are an indispensable tool to businesspeople all around the globe. This is because they are a reliable way to measure the profitability of an investment, they help to keep financial risks to a minimum, and they are simple and easy to use.

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How to Calculate Your Return on Investment

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You invested in property a few years ago, and now you want to know: Was that investment worth it? To find out, you need to calculate your return on investment (ROI). We walk you through how to use the ROI formula and also where you can go for easy calculations.

The return on investment formula

To calculate your ROI, divide the net profit from your investment by the investment's initial cost , then multiply the total by 100 to get a percentage:

ROI = (net profit / investment cost) x 100

To calculate your net profit, subtract your stock's current value from the initial investment price.

Let's say you bought $5,000 worth of stock in a company. In three years, you sell it for $7,000. First, find your net profit: $7,000 – $5,000, so $2,000. Then divide your net profit by the initial investment cost of $5,000, multiplying by 100 to calculate the investment ratio:

ROI = ($2,000 / $5,000) x 100

In this case, you've earned a 40% return on investment—not bad.

The higher the percentage, the better your return on investment. A negative percentage, though, means you actively lost money on this investment.

Annualized return on investment

The ROI formula doesn't account for the amount of time you have a stake in an investment, otherwise known as the holding period. That also means the ROI formula doesn't account for compound interest , or the interest you accrue each year that contributes to the next year's interest . (Another way to think of compound interest is the interest you earn on interest .)

If you want to know how much you're earning year over year, accounting for compound interest, use the annualized return on investment formula:

Annualized ROI = [(1 + ROI) 1/n – 1] x 100

In this formula, n means the number of years you're holding the investment, or the holding period.

Let's go back to our example above, where you determined that your ROI after three years is 40%, or, numerically speaking, 0.4. If you're calculating the annualized ROI, your formula should look like this:

Annualized ROI = [(1 + 0.4) 1/3 – 1] x 100

Following this formula, your annualized ROI is about 11.87%.

Additional ROI calculations

A company's cash flow fluctuates from year to year, and so does your stock's value—which means you likely aren't going to earn the exact same ROI every single year. If you want a more detailed understanding of your ROI, then calculating your ROI and annualized ROI aren't enough. Instead, you need to make a few more calculations:

• The compound annual growth rate (CAGR), or annualized total return, measures your investment's potential growth rate year over year, assuming an average rate of growth and a reinvestment of funds at the end of each term.
• The internal rate of return (IRR) is a much more complicated equation that accounts for more detailed cash inflows (and, alas, outflows) over the course of an investment.

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Tools for calculating your ROI

You can calculate your ROI by hand, but why bother? Online ROI calculators can simplify the process—just input the numbers and the calculator will crunch them for you. Alternatively, run the numbers through spreadsheet software like Excel or Google Sheets. Some investing sites offer free Excel templates to make calculating ROI (and more complicated financial metrics like IRR) a little simpler.

The takeaway

The return on investment equation doesn't tell you how much you're guaranteed to make on a given investment—no equation can tell you that for certain, since the lack of certainty is a key part of the game. Still, it's a useful calculation to have under your belt whether you're investing in stock for the first time or trying to determine if your next investment property will be worth what you paid for it.

Want more financial metrics for evaluating an investment? Check out our piece on another key financial ratio: the future value formula .

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How to Calculate Business ROI [+ Free Excel Template Download]

• December 19, 2023

Brent Walrath

With the end of the year approaching, many company leaders look to gauge their overall success and plan for the next year. A key component to calculating overall success is determining your business ROI .

But what is ROI and why is it an important metric of success? 

In this post, we discuss:

• What is ROI in business
• How to calculate ROI in a business?
• What is a good ROI for business?
• Walking through EBQ’s business investment return calculator

Benefits of using ROI

Limitations of using roi.

Download the ROI Excel Template

Access our ROI calculator to start accurately calculating and projecting your workplace return on investment.

What is ROI in Business?

In business, ROI (return on investment) is a percentage metric that calculates how much profit you’ve made against the investments you’ve made. 

Given how simple this metric is, many business leaders like to use this KPI to determine how much they’ve grown over a given period — often a year.

However, calculating ROI is not just used for determining the entire year’s worth of the company. Other areas of application include:

• Assessing the success of your financial investment (e.g. stocks and bonds)
• Defending the cost of investing in a new solution
• Determining each department’s output against

This means that ROI is a universally accepted measure of growth in the business world.

The ROI Formula

To calculate your return on investment, you need two figures:

• Your net profit (which is taking your overall profit and taking away the costs)
• Your costs*

*Note: There are many costs associated with calculating ROI. We’ll discuss known and hidden costs you’ll need to consider when calculating your return on investment.

From there, plug in this formula to determine your final return on investment:

What are some costs to consider ?

Our advice to fellow business owners is to be aware of two different types of business operation costs:

• Known costs
• Opportunity costs

Known costs are easily calculable costs that you can immediately take inventory of.

Some examples include:

• Customer Acquisition Cost (CAC)
• Employee salary
• Employee benefits
• Office rental space

To make your life easier, using known costs to calculate your ROI will suffice. That said, known costs don’t tell you the whole picture.

For example, some business leaders often miss the opportunity costs associated with running a business. Opportunity cost is the hidden trade-off cost of investing in one sector of your business over the other.

Take the hiring process as an example. If you decide to build your own sales team, your HR and sales leaders need to spend time to:

• Build a large enough applicant pool
• Conduct market research to create a competitive compensation package
• Screen and interview each candidate
• Onboard a new hire
• Train and upskill based on learned best practices

The opportunity cost here is that the amount of time spent on hiring one salesperson is time that could have been used to improve your product and processes . This hiring process doesn’t even factor in the possibility of any turnover effects — such as severance packages or the process of rehiring to fill the open position. 

It’s because of such opportunity costs that many organizations turn to outsourcing organizations. Take our outsourced lead generation team as an example: we’re able to reduce such opportunity costs by providing you with an entire dedicated team from the get-go. Because we have extensive experience working with a wide range of industries, we’re able to integrate your industry’s best practices with our proven processes in a matter of days.

Outsourcing can also reduce your turnover effects by mitigating the effects of losing a team member. Since every specialist is upskilled and trained on current best practices, another specialist from the outsourcing agency can step in and quickly take over the now-open role. That way, your company doesn’t need to spend countless hours rehiring to fill the same position.

If you’re considering outsourcing your sales team, be sure to consider these challenges beforehand. For example, make sure you’re granted full transparency to the outsourcing agency’s success. That way, you’re able to quickly adjust your strategies to maximize success.

What is a good ROI for a business?

You should be aiming for an ROI of >10% year-over-year . However, keep in mind that this benchmark is dependent on your company size and industry sector.

Generally, service-based industries face lower ROI margins . That’s because you typically have to spend an additional 25-35% per head to cover employee benefits to retain high-performing team members. Of course, you’ll need to ensure your entire customer base has adequate labor coverage to continue delighting customers — thus increasing operation costs.

On the other hand, SaaS industries often benefit from higher profit margins. Since you can deploy a singular product across multiple customers, you don’t need as many people to service your customers. You can even outsource your customer service team to push these costs further down and widen your profit margins.

Now that you know how to calculate your return on investment, let’s walk through our Excel template to help you drill down on your ROI calculations.

Walking through EBQ’s Business Investment Return Calculator

Before you download your ROI calculator, make sure you have your gross profit figure ready in hand. To calculate your gross profit, use the following formula:

From there, follow the worksheet to input all of your known business expenses. Your ROI metric will then be calculated at the bottom of the worksheet. Make sure to note any additional expenses not listed in the template.

We’ve also attached a “Labor Costs” worksheet for your reference. There, you’ll find a typical breakdown of what it costs to hire an internal sales development team. If you’re looking for ways to reduce costs, consider outsourcing your sales development team . That way, you can get a whole team of experts for a fraction of the cost of hiring internally.

As we previously mentioned in this post, the ROI metric is a universally accepted KPI for success. That’s because ROI is relatively simple to calculate and is an objective number with clear  benchmarks for your company.

You can apply this ROI aspect of your business as well. You can also use ROI to sell your products or services to decision-makers by providing an average ROI of those who have used your product. This figure showcases the potential acceleration of profit businesses can see once they invest in your solution.

But keep in mind that there are considerable drawbacks to just relying on ROI to determine success.

Generally, strictly using return on investment as the only KPI can be problematic as it does not consider nuances in the number produced.

For example, the ROI metric does not consider:

• Your business operation: If you’re in the early stages of building your company, your ROI tends to be lower as you’re borrowing money from investors to fund your business.
• Hidden costs: For example, the effects of inflation tend to be overshadowed by the ROI figure.
• Time expense associated with the investment: If you’re using ROI to compare growth, make sure you’re measuring against the same timeframe for a more accurate picture.

While using ROI is still a valid way to evaluate success, make sure you and your stakeholders use other metrics to give you a complete picture of your business health. 

How to improve your business ROI

There can be a myriad of reasons as to why you’re seeing a lower ROI number. Typically, it can be boiled down to three main factors:

• Poor processes: We’ve seen a lot of businesses struggling to standardize their process to reflect on what’s worked for them.
• Unfit specialists : Whether it’s because of a lack of training or because of a lack of experience, unqualified team members will hurt your business by reducing productivity and results.
• Inability to track data : The key to company success is being data-driven, so tracking every valuable data is vital to gauging your company’s health.

Regardless of why your ROI is low, we recommend investing in a consultant. Not only do they have experience helping other clients, but they can also understand what it takes to grow a business.

If you’re looking for a team of experts, consider working with EBQ . With over 15 years of experience building other businesses, we know how to scale your businesses based on your current needs and unique business workflows.

TLDR; How to Calculate Your Business ROI

Mastering the art of calculating business ROI is essential for any B2B organization looking to make informed decisions and optimize its investments. By following the comprehensive strategies outlined in this blog post, businesses can gain valuable insights into the performance of their initiatives, identify areas for improvement, and ultimately enhance their overall profitability. 

If you have any questions about how outsourcing can help maximize your ROI, feel free to reach out to one of our Consultants . Our 15+ years of experience allow us to audit your business workflows and find opportunities — as well as accelerate your business goals.

Yes, I want to maximize my ROI.

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What Is Return on Investment (ROI)?

How to calculate return on investment (roi), how to calculate roi in excel, calculating roi in excel example, roi pros and cons.

• Frequently Asked Questions (FAQs)

The Bottom Line

• Fundamental Analysis

Calculating Return on Investment (ROI) in Excel

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Return on investment (ROI) measures the profit generated from an investment. It seeks to identify how much money an investment made relative to its cost.

The formula for calculating this popular profitability metric is simple. You divide the investment's net income by its original cost and then multiply that figure by 100 to arrive at a percentage. The higher the percentage, the more profitable the investment.

Key Takeaways

• Return on investment (ROI) is a popular profitability metric used to evaluate how well an investment has performed.
• It’s calculated by dividing how much the investment made or lost by its cost and then multiplying that figure by 100 to arrive at a percentage.
• The higher the percentage, the more profitable the investment.
• ROI can be calculated easily in Excel. You just input the data, add the formula, and the software works it out.
• ROI is great for making comparisons but doesn’t consider the time value of money.

The formula for calculating ROI is as follows:

(Current Value - Beginning Value) / Beginning Value = ROI

The current value can be one of two things: whatever amount the investment was sold for (its  realized value ) or whatever the investment is worth at the present time (like the  market price  of a  stock ). The beginning value is a historical figure: the price originally paid for the investment or the  cost price . 

We make investments to make money, so it's natural for an investor to wonder whether their investment paid off and by how much. That could be a person valuing how much a stock investment generated or a company analyzing the profitability of an acquisition or purchase of new equipment.

ROI can be calculated either by hand, calculator, or using software such as Microsoft Excel. Excel is generally a great program for doing calculations and keeping track of financial data.

You can calculate ROI in Excel using the following steps:

Open Excel and create a new spreadsheet

The first thing you need to do is switch on whatever device you plan to use and click on the green and white Excel icon. When the program opens, select create a new spreadsheet.

Label the cells

Before entering the data into the various cells in the spreadsheet, you’ll want to give these cells a name. For example, in cell A1 you could write “amount invested,” in cell B1 “amount gained from investment,” and in cell C1 "ROI." Entering these descriptions is good for record-keeping and will help to avoid confusion later.

To avoid potentially losing your work, make sure you save your Excel document regularly.

Now you can start inputting the various data required to make the ROI calculation. Using the above example, type the amount invested in cell A2 and the amount made from the investment in cell B2. These two figures are needed to compute the profit generated on the investment.

Input the formula

It’s now time to make the calculation. In the cell where you want the ROI to appear, type without any spaces = followed by the name of the cell where you put the amount invested, the forward slash sign (/), and the name of the cell where the amount made from the investment appears. Using the example above, you would type “=A2/B2” into cell C2.

Get the percentage

All that’s now missing is the percentage. To get the final result, click the % icon while highlighting the cell where the ROI appears. In our example, that would be cell C2.

Let’s imagine we recently sold an antique on eBay and wanted to figure out the ROI in Excel.

First, we need to label our cells. Let’s type “initial cost” in cell A1, “financial gain” in cell B1, and “ROI" in cell C1. Next, it’s time to input the data. In A2 we type 15, which was how much the antique initially cost when it was bought at a flea market 15 years ago, and in B2 we type 218, which was how much the antique was sold for, less the initial $15 invested and $8 billed postage cost.

All that’s left now is to calculate the ROI. In cell C2, type “=A2/B2,” press enter, and then click on the % icon. If everything went correctly, C2 should now read 7%. This is our ROI.

A positive aspect of ROI as a performance measure is that you can easily compare the total return of different investments. 

However, there are a few considerations to keep in mind. Sometimes in the basic ROI formula the "current value" is expressed as a "gain on investment." This isn't completely accurate. If you started with $100, and ended with $140, your gain on the investment is $40. But the current value is the entire $140. 

The other big one is that ROI only   measures from an arbitrary endpoint. It does not consider the time value of money , which is a critical element of return. This is especially clear if you look at the 2020 ROI of -18% in the table above. That is not a yearly change from the prior value of 2019. Rather, it's the total change measured from the start, in 2017. While it accurately reflects total return over the period, it doesn't show the annual return or the compounded rate of change.

How Do You Calculate ROI on an Investment?

ROI is calculated by dividing the financial gain of the investment by its initial cost. You then multiply that figure by 100 to arrive at a percentage.

What Is the Difference Between Irr and ROI?

Both return on investment (ROI) and internal rate of return (IRR) measure the performance of investments or projects. ROI tells you the total rate of return for an investment from the beginning to the end, or the present moment, whereas IRR reveals the annual rate of growth that an investment is expected to generate.

What Is a Good ROI Ratio?

That depends on a number of factors, including the type of asset and the length of time it was held. Some things are expected to grow in value, whereas other things generally deteriorate in value. In the case of stocks, a good benchmark to use would be an index like the S&P 500. A decent ROI would be anything above the return generated by the index. Time is also important as you need to account for inflation. $100 five years ago isn’t the same as $100 today.

Return on investment (ROI) is one of the most popular profitability metrics out there. It’s used by companies, big and small, as well as individuals to calculate the money they made off an investment.

Calculating ROI is simple, both on paper and in Excel. In Excel, you enter how much the investment made or lost and its initial cost in separate cells, then, in another cell, ask Excel to divide the two figures (=cellname/cellname) and give you a percentage.

Harvard Business School. " How to Calculate ROI to Justify a Project ."

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How to Calculate the Return on Investment for Your Startup

How to calculate roi for a startup.

Return on investment is a typical business concept for calculating the financial benefits of an investment. To measure the performance of a business, managers and executives often calculate the return on investment (ROI). This value can be used to define anything from a monetary return to an efficiency ratio and is typically expressed as a percentage or a ratio. 

In this article, we will go through the definition of Return on Investment, the importance and benefits of ROI calculations, and teach you how to calculate ROI for your startup.

What is ROI?

Return on investment is a performance measure that can be used to evaluate the effectiveness or profitability of an investment or compare the efficacy of several different investments.  The return on investment, or ROI, is an attempt to directly evaluate the amount of return on a specific investment in relation to the cost of the investment.

A company can measure the profitability of any expenditure by calculating the return on investment. Buying pens or fixing an employee's desk are expenses that may not have a direct or monetary return on investment (ROI), but they are still part of a more significant investment. Spending money on a graphic designer to make commercials, a photographer to capture headshots, or a web developer to redesign the company's website are all investments with the potential for a return.

Return on investment (ROI) is a standard metric to assess a project's viability.  An angel investor , for instance, might want to calculate the expected return on their investment before putting money into a company. Divide the annual income or profit by the initial or current investment to estimate the return on investment (ROI).

What is ROI used for?

The return on investment (ROI) metric can assess numerous investment choices by contrasting them to their starting prices. Calculations of return on investment (ROI) are frequently used by businesses when considering previous or prospective investments.

Individuals can analyze their investments and compare one investment to another, whether a stock holding or a financial stake in a small firm, by calculating the return on investment (ROI) and comparing the two.

Sometimes, businesses will employ a project's return on investment (ROI) as a metric of its performance. Before committing to an advertising campaign, a business owner will want to know what kind of return they can expect on their investment. A company's return on investment is considered positive if the money earned is greater than the sum spent.

When calculating annualized ROI, the average yearly return on investment realized during the investment term is what you're after. This is useful because the return on investment (ROI) doesn't account for the time spent holding an investment when calculating ROI. The rate of return on an annualized basis is helpful for comparing the results of various investments across different time frames.

What Are Examples of ROI Calculations?

Businesses might encounter difficulties calculating the investment amounts for each part of the ROI equation.

Considerable investment in new computers, for instance, has several deployment expenses that must be calculated and accounted for. The company must calculate the total cost of ownership, which includes the purchase price, any applicable taxes and shipping fees, any consultation or support fees paid, and the cost of initial installation and ongoing upkeep.

After that, the company would need to determine its net profit for a specified time frame. Hard monetary gains from enhanced efficiency and decreased upkeep expenses relative to older computer systems may contribute to these bottom-line gains.

Thus, a company can compare the return on investment (ROI) of two different computer systems by factoring in upfront expenses and long-term benefits. Which of these two computers, then, is the better financial bet?

At the end of the specified period, the company may use actual data for the total net income and the entire investment cost to determine the ROI. The computer implementation can be gauged by comparing the actual and predicted ROI.

What Are the Benefits of ROI?

When making decisions for your business, knowing how investments affect your profits and your business is essential and beneficial.

There are many benefits to calculating ROI for your business . Let's take a look at some.  

• It's easy to figure out how to calculate return on investment. It only requires a few numbers that may easily be found in any set of financial statements or balance sheets. You need a few business metrics, like net profit and the amount of investment required, which will give you a quick idea of your initial investment.  
• It's easy to figure out what your ROI means. If the number is positive, you made money on this investment. If the number is negative, it means you lost money. ROI is easy to understand, even for people who aren't accountants. Because it is so widely used and so simple to calculate, it enables more accurate comparisons between various companies regarding their investment returns. This makes the calculation results a valuable metric to use when talking to investors.  
• ROI can be worked out for several different investments or your business. This lets you see what parts of your business have been helped by a particular investment, like a marketing campaign that brought in more money or a second location that helped you sell more. As we mentioned, it is a metric used to measure the success of an organization's financial decisions for a specific department or division. The improved metric will help determine which businesses or teams are the most profitable.

How Do You Calculate ROI?

For big companies, figuring out ROI can be a difficult task. But the process is easy for people who own small businesses.

For example, to determine the return on your first business investment, you need to know how much you put into the business and, if you have any, how much long-term debt you have now.  You will also need to know how much money you made after taxes for the year. All this information is in your accounting software, your spreadsheet, or your accounting journals.

There are several ways to figure out the ROI. Most people use net income divided by the total cost of the investment = Net income / Cost of investment x 100.

Here is an example of how a business might calculate its return on investment.

Let's assume that Joel has an e-commerce business. He runs an e-commerce business that sells dog-related products. He wants to raise awareness and boost sales before the holidays, so he buys some social media ads. He spent a total of $2,000 on ads on social media sites to get people to visit his site during the holidays. 

After the end of the holiday shopping season, Joel does the math on his net profit and discovers that the online store he owns has made $10,000 more money than it did during the same time the previous year. After that, he can calculate the advertising's return on investment using the following formula:

ROI = (10,000 / $2,000) x 100 = 500%

This indicates that Joel made five dollars more in net profit for every dollar he invested in advertisements. He can now start to budget for increased expenditure for the upcoming holiday season now that he has seen such a high return on investment (ROI).

Why Is ROI Important for Your Business?

Making smart financial decisions is essential for the success of your business. Your return on investment (ROI) is a crucial metric that can help you compare different investment strategies and determine which will make you the most money.

You can use this metric to make business decisions like investing in a new business or buying a new property to make room for growth.

You can A/B test ways to invest, like on social media platforms. This could be a comparison between Meta and Instagram in terms of your return on investment. For example, you could put the same amount of money into advertisements on each platform, which may give you a better return.

By comparing and evaluating this metric across different investment channels, you can make better financial decisions, get the best return, and grow your business.

How to Increase Your ROI

Depending on what kind of investment you want to make, the best way to increase returns will vary. But there is a way you can try before investing to increase your chances of getting a high return on your money. Eurokick is the solution!

Eurokick is ready to help your startup calculate your return on investment and increase your ROI. Eurokick supports and monitors your startup in every way possible. Contact us and get more information now!

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A Simple Guide to Marketing ROI [Formula & Examples]

Updated: February 01, 2021

Published: July 17, 2019

Whenever you launch a new marketing campaign, you should test whether the cost of the project is helping or hurting your company. To determine something's profitability, many marketers look at ROI -- or return on investment. At the most basic level, ROI compares the amount of money you spend on a project with the amount of revenue you gain from it. 

Ever wonder why we never saw a third sequel to the Jim Carrey classic, Bruce Almighty ? One major reason could be the disastrous ROI of 2007's Evan Almighty .

A few years after 2003's Bruce Almighty grossed over $484 million , a sequel was made that starred The Office 's Steve Carell . 

In 2007's Evan Almighty , God, played by Morgan Freeman, commands Carell to build an arc like the biblical figure, Noah. The movie's marketing, award-winning cast, and special effects might have seemed promising at the time. But its production costs led to it having the biggest budget of any comedy film at $250 million . After the studio, cast, and crew spent huge amounts of time and money on the film, it only made a dismal $67 million in its first two weeks of release.

In comparison, Bruce Almighty, which had a budget slightly over $80 million , made nearly the same amount in its opening weekend. 

While this example looks at ROI on an incredibly large scale, the strategy of measuring your returns can be incredibly helpful to marketers or small businesses as they learn which tactics are and aren't worth repeating.

What's a good ROI in marketing?

The goal of ROI is to make more than a dollar for every dollar you spend on a marketing campaign. What's considered a "good ROI" can vary based on the type of marketing strategy, your distribution channels, and your industry. 

Determining one overall marketing ROI benchmark is challenging because all marketing tactics are different.

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When dealing with an online ad strategy like PPC, where ROI data is usually tracked automatically, you might be able to easily see how your ad's return compares to others that are similar. Platforms like Google Ads also have years of extensive data to back up their reported 800% ROI benchmark.

If you're dealing with other strategies, like content marketing, it might be hard to tell if your blog posts, podcasts, or videos are leading directly to a purchase -- especially when the content isn't on or linked directly to a landing page.

In fact, the Content Marketing Institute says that determining ROI has felt like a mystery to marketers for decades. Although the invention of tracking URLs and other technology has helped to determine the success of content, CMI still suggests looking at ROI from a long-term perspective and factoring in non-financial gains including audience growth. 

For most businesses, one good way to set a "good ROI" benchmark for each marketing strategy is to look at the return from similar tactics you've tried in the past, as well as your current sales numbers. That information should help you create ROI benchmarks and goals that are realistic for your company.

When it comes to calculating marketing ROI, here's a simple formula you can follow:

Marketing ROI Formular

[((number of leads x lead-to-customer rate x average sales price) - cost or ad spend) ÷ cost or ad spend] x 100.

To use the marketing ROI formula, you'll need to identify the following things:

• Number of leads: How many people converted to a lead ?
• Lead-to-customer rate: What percentage of leads became a customer? If 12 out of 100 leads become a customer, your lead to customer rate would be 12% or 0.12.
• Average sales price: The average price of your product. An average can be helpful if you occasionally apply discounts or alter pricing in other ways.
• Cost or ad spend: How much did you spend on creating and promoting the marketing campaign? Here, you can factor in costs including ad spend , hourly wages of people who put time into the project , or costs related to producing content.

If you're terrible at math, don't worry. HubSpot customers can access an ROI calculator programmed with the same formula in our CRM. 

Aside from looking at hard revenue, you might also want to consider other non-financial elements when determining if a marketing strategy is successful. These could include follows or likes on social media, unexpected traffic to your website, or even a sense of increased trust from your customers.

While these things don't offer an immediate financial return, they might indirectly boost purchases or customer relationships later on. 

In this post, we'll give you a few tips on how to determine financial ROI for six common marketing strategies. We'll also describe a few fictional small-business marketing scenarios to show you how to use the ROI formula.

Marketing ROI Examples

Written content.

In our 2018 State of Inbound Report, we saw that 82% of marketers who blog see positive ROI in their Inbound Marketing strategy. 

Although it might cost less to produce a blog post than a video, written content can still cost you time and money. If blogging is part of your marketing strategy, you'll want to calculate time-related costs, production costs, and promotional costs into your total spend. To translate time into a dollar amount, track the number of hours that an employee spent on the project , then multiply that number by their hourly wage. 

For example, if a blogger is paid $20 an hour and takes four hours to write a promotional post, your total cost will be $80 in labor plus any costs related to promoting the post. 

If your blog links to a landing page, you'll want to use a tracking URL instead of a basic page URL so you can see how many visitors are coming to the page directly from the blog. 

Through tracking visits, leads, and customer conversions related to a blog post or article, you can see how efficient your strategy is. If you're creating content that generates ROI, but realize that writing time is taking too long, you might want to look for ways to streamline that process. If you're not getting ROI, you might want to make other adjustments to your plan or pivot to a new marketing strategy. 

A law firm that focuses on housing-related cases wants to gain more clients. They write five blog posts about tenant rights. Each post includes a tracking URL that links to a landing page where prospects can request a free legal consultation.

The firm spent $900 paying employees to draft five blog posts and $100 to promote it. The posts result in eight leads -- four of which become clients. The firm made an average of $2,000 per client.

Here's how their ROI would be calculated:

[((8 x 0.5 x $2,000) - $1,000) ÷ $1,000] x 100 = 700%

If this rate of return works for the firm, they might want to continue the strategy as is. If they like the strategy but want to increase the ROI, they might try creating a video to see if it's more effective or try to churn out posts at a higher frequency.

Email Marketing

While some might think email is outdated, it's actually still a key marketing tool. In fact, a business can make $38 dollars for every dollar they spend on an email. Although the ROI may depend on how big a mailing list is, the type of ad in the email, or the audience the email targets, this marketing strategy still might be worth a company's time.

While you might not need to track production time for a linked ad or CTA in an email, you'll still want to be tracking the traffic it drives to your site. Like the written content example above, we suggest using a tracking URL . 

Here's an example of how a company might measure ROI of email marketing.

A local dog daycare offers a weekly e-newsletter to customers and those who sign up on their website. An organic dog food company pays them $100 to place an ad that links to a purchasing page for their newest product.

Because the ad is linked with a tracking URL, the dog food company can see that it drove 50 visitors to their product page. Of those visitors, 20 placed the dog food in their cart and 17 purchased it. That ROI formula would look like this:

[((20 x .85 x $20) - $100) ÷ $100] x 100 = 240%

After seeing how much money they gained from the newsletter, the dog food company might continue to place ads in that weekly email. They might also want to branch out to other dog-related emails.

Video Marketing

A whopping 83% of marketers say video gives them strong ROI. But like any type of content marketing, you'll need to spend time and money on producing videos. You might even need to buy or rent film equipment or editing software. 

As you script and produce a marketing video, use these tips to film it affordably . You'll also want to keep track of the total cost of labor, equipment, and promotion. 

You should be sure to identify ways that you'll measure your video's effectiveness. For example, if you upload a video to social media platforms, you should include a tracking URL in the post caption that leads to the product's landing page. This way, you can see how many visitors were driven to the page because of the video post.

A sales AI software company is launching a new product that automates many menial tasks within the sales process. The company has a landing page for demo signups, but they haven't generated many leads. They think it's because the average sales person isn't understanding what this AI technology can do to help them. 

The team decides to make a demo video to show sales reps how the software works and how it can help them cut down on time-consuming tasks. The video is shared on LinkedIn along with a tracking link to the demo signup landing page. The video is also placed on the landing page itself.

It cost the company $300 to buy video supplies and $200 in labor to produce the video. After it was circulated, it resulted in five demo signups which lead to three purchases of the $2,000 product.

Here's their formula:

[((5 x 0.6 x $2,000) - $500) ÷ $500] x 100 = 1,100%

Since they made $1,100, the software company might continue making demo videos. Now that they've already made a one-time purchase of supplies, they also wouldn't need to calculate that cost into ROI of future projects. 

Sponsored Content

When a brand doesn't have time or bandwidth to produce their own branded media, they might pay another person, publisher, or company to create sponsored content . While staffing someone outside of your office will cost your company money, you might want to think of the extra hours your team will have to do other productive projects if they don't have to create content.

While you don't need to track labor costs of your own employees, you will want to use the ROI formula to see how the payment for the sponsored content compares to the amount of money you gained from the campaign.

A boutique wants to promote their new line of summer dresses, but they don't have time or equipment to make a video. They connect with a local fashion influencer and pay her $300 to do an Instagram video titled, "The Best Summer Dresses for 2019." 

They tell the influencer to place a tracking URL to the online store in her bio. She also directs viewers to the bio in the video's caption. Through the tracking link, the boutique can see that they've gotten 50 visits. Of those visits, 30 people put an item in their cart. Ten purchased one of the $50 dresses.

They use this formula to calculate their ROI:

[((10 x 0.33 x $50) - $300) ÷ $300] x 100 = -45%

Because they lost money on this, the boutique might want to move away from influencer marketing and invest on in-house strategies.

If they realized they gained more of a social media following, or more traffic than usual, they might still want to continue with the influencer. But to see if they can improve ROI, they might have her post the same video and link on more social platforms to see if gains more traction. 

PPC Campaigns

With pay-per-click, you're paying for every click your ad gets , even if it doesn't lead to a sale. While Google says its advertisers get a strong ROI , small businesses still waste 25% of their budget on poorly managed PPC campaigns. After your ad is launched, you'll want to closely monitor ROI and wasted spend to learn from and avoid major losses on an ad. 

There are a number of tools that can help you monitor and manage live PPC campaigns. You can also use our ROI formula to look at your ad's performance. Here's an example that shows you how:

An online gardening store wants to use a PPC ad to spread awareness of a new line of luxury lawn mowers -- which cost $1,000 each. 

On their first campaign, where the price isn't shown, they spent $1,000. Of the visitors they received, three placed the item in their cart and one made a purchase. In the next campaign, they included the price. They spent a total of $500. Of their web visitors, 12 placed the lawnmower in a cart and seven purchased it. 

To see how the PPC ad's script change impacted ROI, the garden store could use the formula for both campaigns. They could count users who carted the product as a lead. 

First Campaign: [((3 x .33 x $1,000) - $1,000) ÷ $1,000] x 100 = -$1

Second Campaign: [((12 x .583 x $1,000) - $500) ÷ $500] x 100. = 129.92%

From this comparison, the company is able to see how price transparency can cause more qualified leads to click on the ad. They also might realize that price transparency helps them avoid paying for the clicks of people who can't afford the lawn mower. 

Paid Social Media Promotion

If a company has an audience that regularly uses social media, like Facebook, Twitter, or Instagram , they might want to consider boosting one of their posts so it's promoted on newsfeeds of target audiences. 

With most social promotions, you'll be able to set a goal or audience target, a time limit, and a budget. Tracking your ROI can help you determine if the social boost strategy is working, as well as the types of posts that lead to the best return.

A lifestyle publication is trying to gain web subscriptions, which cost $10 a month. They decide to offer a one-month free trial to pull in leads. They create a post about the trial for Twitter which includes a tracking URL that leads to the free-trial landing page.

They boost the post for four days with a budget of $25 per day. In the timespan of the posted boost, they'd received 100 visitors and 20 signed up for a free trial. Of the 20, four become paid subscribers.

Here's the calculation:

[((20 x .2 x $10) - $100) ÷ $100] x 100 = -60%

Because the publication lost $60 and still has to honor the free subscriptions they gave out, they might decide to avoid boosting posts on this platform. If they haven't given up on a boosting strategy just yet, they might try paid promotion on another social platform next time. 

Best Practices of Measuring Marketing ROI

When it comes to marketing, determining ROI can seem tricky. While more traditional PPC and social media ads can provide more specific rates of return, it can still be challenging to link hard revenue numbers to marketing content like videos and blogs. 

Regardless of which marketing strategy you're using, monitoring the following factors can help you determine if your campaigns are really successful:

• Time: How much time did it take to create the marketing materials?
• Production Costs: Track the total cost of supplies, services, and software needed to create the campaign.
• Promotional Costs: Did you spend anything for promotion? If so, add that to your total costs.
• Page Analytics: Use a tracking URL to determine if your content is driving traffic to your product's landing page.
• Non-Financial Returns: Did you gain any social media engagement, unexpected traffic boosts, or other bonuses from your campaign? If so, this could still be helping your level of brand awareness.

For more on content-related ROI, check out this step-by-step guide that offers tips on how to track it and a list of tools that can help you. As you gain more customers, you might also want to check out this infographic that dives into ROI associated with great customer experiences.

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How to Calculate ROI Before Buying a Business

June 26th, 2020 |  Small Business Resources

Founding a startup company can lead to excitement and rewards. On the other hand, if you want a way to own a small business with all of the rewards and a little less excitement, you might consider buying an existing business. If you buy the right company, you should already have a customer base, revenues, employees, equipment, and an effective business model on the first day.

How to Calculate Your ROI When You Buy an Existing Business

To ensure you’re investing in a good business, you should learn how to carefully calculate the business ROI. ROI calculations are pretty simple, but ferreting all of the information you need to perform the calculations may not be. This means you need to learn which questions to ask and how to verify answers.

These suggestions can help you figure out the real returns you can expect from an existing company before you write a check or apply for a business loan:

Should You Allow for an Owner’s Salary?

Most owners plan to run their companies as the manager or CEO. If so, they may plan to pay themselves a manager’s salary. For very small businesses, this income may consume a large part of the profits. You want to use ROI calculations to understand the returns that you can enjoy from your business investment. Still, you might wonder if you should include your own salary as part of the profits or as an added expense.

Different advisors have different opinions about which side of the equation to include the owner’s salary for managing the business on. Your business goals may help you decide how to treat the manager’s salary that you will pay yourself:

• If you plan to grow the business to sell it at a profit in the future, you might want to treat this salary as an expense. In this case, you’re mostly interested in the company’s value. Also, you will get a clearer picture of how profitable the company would be if you weren’t in the picture.
• If you plan to manage the company for decades and then pass it on to your heirs, you might leave the salary out of your expenses. Your main reason for investing in the company is as a way to generate income. You just want to be certain that your company can pay your salary and may not care about additional profits as much.

In either case, both the salary and the profits benefit you as a small business owner. Remember that these different ways to take an income may impact both your personal and business taxes. It’s probably best if you can run your calculations both ways, especially if you are comparing different businesses that you might hope to buy to determine which one will benefit you the most.

Calculating ROI Before You Buy a Business

Typically, calculating ROI only involves simple math. You simply divide profits by expenses. For instance, if you spend $100,000 to earn $40,000, you have an ROI of 40 percent. Of course, this figure is much more reliable if you use it to calculate a business ROI that you already control. If you’re trying to figure out the value and returns from an existing business that seeks a buyer, you may have to rely upon information that you get from the current owner.

This isn’t meant to imply that you can’t find reliable and honest business owners. You should just remember that the existing owner is also an eager seller. Even the most honest owners may neglect to account for all expenses because they may not have done a great job of tracking ROI in the first place. If you have the training and experience to properly value an existing company, you’ll know that you need to request tax returns, bank statements, and accounting ledgers from the past few years.

If not, you might hire consultants to help you. These professionals may be accountants or other financial professionals with the skills and experience to guide you properly. Even if the current business doesn’t provide the returns you may have hoped for, business consultants might also provide you with some simple guidance that can help you cut costs or enter new markets.

What’s a Good ROI to Expect From a Small Business?

Large corporations might enjoy great success with an ROI of 10% or even less. Because small business owners usually have to take more risks, most business experts advise buyers of typical small companies to look for an ROI between 15 and 30 percent. Of course, If you decide to take a salary from your business, you may not need an ROI of 15 percent, but you still need to consider how you could profit from your business if you decided you did not want to run it any longer.

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What ROI Should Really Look Like for Your Company's Public Relations Campaigns Many companies see the value of PR and are willing to invest in it. But they want lickety-split results and to see themselves plastered all over the news.

By Emily Reynolds Bergh Edited by Micah Zimmerman May 16, 2024

Key Takeaways

• ROI equates to more than that nowadays — many different steps play an integral role in a comprehensive PR strategy that yields impact.
• When it comes to your public relations efforts, success is defined as conversion.

Opinions expressed by Entrepreneur contributors are their own.

Most businesses have to invest in public relations in one form or another these days. Whether they attempt it themselves or use an outside agency, it's basically de rigueur in today's marketplaces and workspaces to establish an online presence, craft your messaging, publicize your brand and build your customer followership .

Lucky for me, I run my own PR firm, so the services I offer are becoming more essential than optional in an industry that hit the $20 billion mark in 2023 and is seeing year-over-year steady and sustainable growth . But no matter the size of the market or the increase in the number of PR firms nationwide, what really matters to clients — what has and always will matter most — is a return on investment. How much should a business invest in PR, and how is ROI measured to gauge success?

The first question is easy to answer: You should invest as much as your budget allows to get your name out there, capture coverage and solidify your reputation as the best in your industry. Determining whether or not that investment is paying off for you in the ways that you want is a whole different matter.

Related: 5 Ways to Get on the Media's Good Side (and Stay There)

How ROI "success" is defined in PR

When it comes to your public relations efforts, success is defined, at the core, as conversion ; that is, seeing the products of your PR budget translate into tangible, measurable results in such terms as increased traffic, increased press mentions and increased sales. But it's important to note that PR conversion really isn't about direct financial returns; in the sphere of publicity, the raison d'être, the real goal post, is media exposure. The more buzz you can create, the more your PR strategy is working.

To create maximum buzz, you need an array of combined marketing and PR services all working in tandem to optimally position and promote your enterprise. When you combine all the components listed below into your PR plan, you create a digital marketing funnel , which should necessarily incorporate calls to action to drive the funnel. It's actually the funnel that creates the conversion that creates the customer relationships that (eventually) turn into direct sales. And it all starts with exposure. So let's start with exposure as one of the principal means to realize ROI.

ROI result #1: Press coverage

For years, I've been screaming from the rooftops that successful PR is about more than press clippings. But you know what? Press clippings are important, not just as a quantifiable reflection of the media hits your PR efforts are generating, but how satisfied a business feels, in qualitative terms, that its efforts are bearing fruit. Clippings aren't the only form of media coverage and media coverage isn't the only barometer of ROI success, but they're still pretty good indicators and will remain so. Who doesn't want to hear that their press release was picked up by 50+ outlets, that their product will be featured in an upcoming gift guide or that there are half a dozen podcast invites waiting in their inbox? No businessperson ever.

ROI result #2: Competition analysis findings

A PR specialist doesn't just concentrate on your business; a savvy pro knows to research what your competitors are doing to outrank or outsell you. When the analysis reveals practical, verifiable findings that can be applied to your own PR campaign (like the most effective media channel for your particular service), it's like unearthing a nugget when panning for gold.

I recall working with a really passionate business owner who couldn't understand why her own marketing efforts were falling flat. To her complete shock, I discovered that a similar company with the same name was also operating in her area. First, we implemented a brand identity shift; once that was established, we launched outreach and PR efforts anew. It worked. By distinguishing herself in her market, her market base began to grow.

Related: 10 Expert Insights for the Optimal (and Most Effective) PR Budget in 2024

ROI result #3: Website optimization and asset accuracy

Most companies already have a website up and running and a good deal of company collateral before they hire a PR agency. But are those tried-and-true marketing vehicles functioning at their highest level and are the assets truly spotlighting the company's distinction?

I once worked with a client whose website was just so, well, blah. Why would visitors engage with a company that can't catch their attention and interest? Another time, I created an eblast for a client, writing the pitch and providing them with the mailing list — all they had to do was attach their spiffy-looking flyer and press send. Only there was a misspelling in the subtitle of the flyer. One of the high-profile outlets it was sent to noticed the typo and emailed me about it. That was the last that outlet would talk to me about that particular client. Point being: Part of a comprehensive PR campaign is a thorough review of your existing assets and informed recommendations of how to elevate them and make them far more effective.

ROI result #4: Social media engagement

Recall what's been said about revenue not being the holy grail of PR. Rather, expanding your online presence contributes to the marketing funnel that trickles down to your company's bottom line bit by bit, and that's why exerting targeted effort on your social media platforms to garner the largest following you can is of paramount importance.

PR professionals have insider intel on what to post and when, what should be a story and what should be a reel, and the ideal frequency and content for your particular market. So when your number of followers and calls to action climb, you can tell that your PR campaign is properly capturing the personality of your business and accessing your intended audience.

ROI result #5: SEO outcomes

SEO isn't always a standard part of a PR package, but if you have the option, take it. With the entire business world online now, commerce is being conducted on screen via the power of search engines, making search engine optimization the key that's driving the whole machine. If you spend thousands on a state-of-the-art website, you want searchers to visit it. If you write a guest blog , you want people to read it. If you're ranking higher, seeing more traffic and getting more click-throughs once your SEO-enhanced PR plan has been put in motion, it's a sure sign that the plan is working.

Related: Does PR Actually Help Increase Sales? Yes — Just Do It Right and Be Patient

ROI result #6: Cumulative effect of a medium- to long-range PR strategy

In my line of work, everyone seems to want immediate gratification; they want to become a superstar overnight, with a guest spot on the Today show and a feature in the New York Times . But that's not the way a calculated PR plan plays out most of the time. Instead, it's more of a long (or at least a medium-term) game in which each deliberate action builds on the one before it and lays the foundation for the one after it.

You want to be proactive, yes, but also patient. You want to see results, sure, but they're not likely to happen at lightning speed. If you give your PR campaign a chance to do its job, it will advance at a manageable pace, and the cumulative buildup will yield consistent, dependable developments. Slow and steady wins the race here, so you'd do well to keep your hopes high but your expectations in check.

Final thoughts

ROI in PR isn't just an abstract concept. There are other ways to evaluate it apart from those discussed above (speaking engagements or great customer reviews, for example), and there's an abundance of measurement tools available now to actually show clients (not just tell them about) ROI statistics (but that's a whole different article for a different day). If you've got a top-notch public relations company in your corner, real results can be actualized and evidenced — the kind of results that take your business to the next level… and then the one on top of that!

Entrepreneur Leadership Network® Contributor

Founder at R Public Relations Firm

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Which is better for your team: ClickUp or monday.com? Use our guide to compare each tool's pricing, features, and more.

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