ROI
Return on Investment
Quick definition
Return on investment (ROI) is the net return on an investment as a percentage of its cost. In marketing it compares the return from marketing activity with what the activity cost.
Formula
ROI = (Return − Cost) ÷ Cost × 100
Formula variables
- Return
- The benefit gained from the activity. Many teams use gross profit; some use revenue. State which.
- Cost
- All the costs counted for the activity, which should match the scope of the return.
Worked example
- Gross profit from the campaign
- $50,000
- Campaign cost
- $20,000
(50,000 − 20,000) ÷ 20,000 × 100
Result: 150%
After covering its cost, the campaign returned 150% of what was spent. The figures are illustrative.
How definitions differ
- Revenue or profit as the return
- Using revenue as the return overstates ROI, because costs of the goods sold are ignored. This is why ROI based on revenue is not the same measure as ROI based on profit.
- Cost scope
- Whether ad spend only, or also creative, agency and tooling, are counted changes the result.
How to interpret it
ROI is a profitability measure: a value above zero means the activity returned more than it cost on the chosen basis. It differs from ROAS, which compares revenue with ad spend and ignores other costs.
Because teams define return and cost differently, the definition should be stated whenever ROI is quoted.
When it is useful
- Judging whether a campaign or programme paid for itself.
- Comparing activities on the same basis.
- Explaining marketing results to finance.
Limitations
- The result depends on the choice of return and cost.
- Long-term effects such as brand building are hard to capture.
- Attribution of the return to marketing is an estimate.
Common mistakes
- Using revenue as the return without saying so.
- Counting only some of the costs.
- Confusing ROI with ROAS.