Return on Investment (ROI): what it is and how to apply it in practice

In any business, it is essential to monitor the performance of actions taken and evaluate the results obtained. It is important, for example, to accurately know the efficiency of investments made in campaigns. For this, it is necessary to analyze the key indicators to understand the scenario in which an organization is.

The indicators used to evaluate the performance of a company, known as KPIs, are the most important metrics to be evaluated in a business. They show the results of what is being done at the moment and also how to improve them. One of these metrics is the ROI, an acronym for Return on Investment, which, as the name itself already defines, is the return on the investment that was made in some action.

In this post, we will explain in detail what ROI is, how to calculate it, its importance for your business, examples in practice, and the advantages of measuring the return on any and all investments. Keep reading until the end and find out!

What is ROI after all?

ROI is one of the most important KPIs to analyze as it allows you to know how much money a company has earned or lost with investments made in actions or campaigns carried out in different channels, mainly in the digital marketing area. This indicator provides the final result of each strategy launched, in addition to measuring the cost of everything necessary to reach the expected result, identifying which investments are worthwhile, such as marketing strategies, new tools, and training, among others.

In addition to verifying worthwhile investments, ROI also helps to optimize those that are already being made so that they can perform even better. By knowing the return on investment of specific actions, it is possible to plan targets based on tangible data and understand what is going well and what is not, and thus be able to change the strategy.

How to calculate ROI

But it’s no use knowing what ROI means, recognizing its importance, and not knowing how to calculate it. Well, the formula works like this: ROI = (revenue generated – costs) / costs x 100. Let me explain: the calculation is done by subtracting the gain from the investment that was made by the cost of it and then dividing the result by the investment cost. Then, multiply the result of the operation by 100, and you will have the ROI number in percentage.

Here’s an example: imagine that your company has earned BRL 200,000 in revenue, and the initial investment was BRL 20,000. Calculating: ROI = (BRL 200,000.00 – BRL 20,000.00) / BRL 20,000.00 = 9 x 100 = 900. In other words, a 900% return in percentage – the return was 9 times the initial investment. The formula is simple, isn’t it?

Revenue and cost values in ROI

When calculating the ROI, the revenue generated is all the financial value that came in as a result of an investment that was made. These are the gains obtained through the investment. For example, if you invested BRL 300.00 in paid media campaigns to advertise a product and managed to sell 30 units of it at BRL 100.00 each, you would have profited BRL 2,700.00, resulting in an ROI nine times the initial investment value or a 900% return in percentage. The calculation would be as follows: BRL 3,000.00 (amount of revenue obtained) – BRL 300.00 (amount invested) / BRL 300.00 (amount invested) = 9 x 100 = 900.

Cost encompasses what a company invests to earn revenue. This includes everything that was invested to achieve profit, such as technology, people, and financial resources, among others. Examples include a new tool, training to qualify employees, or salary increases. All of this is done with the intention of generating future profit. It is important to plan carefully what will be invested to avoid ending up with more costs than profit in a project.

The importance of calculating ROI

The ROI is very effective in determining whether a company is losing or making money with a campaign and is suitable for any type of investment, across different sectors and channels, such as marketing campaigns, product and service sales, and event hosting, among others.

Paying attention to this indicator is interesting for understanding how much revenue you can earn, calculating whether an investment is worthwhile based on ROI. You can also plan goals for your business by analyzing achievable outcomes, considering what has been done previously based on ROI. Additionally, it is possible to identify the time that investments take to bring returns in each area.

Understanding what ROI means for your business and how this indicator influences your goals will be essential in helping you set realistic goals and constantly monitor the actions taken. Here’s why ROI is important for any organization:

• It allows for understanding the profitability of the business.
• It can be calculated for any type of investment.
• It can be used across different marketing channels.
• It clarifies doubts and helps in understanding the obtained results.
• It attracts the attention of investors and partners.
• It enables the planning of goals based on data.
• It determines the time required to obtain a return.

How to evaluate the results obtained with the ROI

Of course, it’s not enough to just calculate the ROI and that’s it. Once you’ve figured out the ROI value, you need to assess how much it impacts what your company has invested, which can vary greatly. Everything will depend on the action that was carried out, the planning and strategy used, and the required period to obtain the results, among other details.

With the ROI in hand, it is possible to analyze what was done – and also what was not done – to influence the result, in addition to understanding whether your ROI value is considered high or low, depending on the points mentioned. It may happen that your ROI brings a negative result for your company, so it is important to understand the calculation to identify problems and seek to solve them.

Now that you know what ROI is, how to calculate it, its importance, and how to evaluate the results obtained, it’s time to calculate your business’s ROI! Afterwards, it will be much easier to assess whether your actions are bringing the expected results or whether you will have to optimize them to obtain the desired profits from your investments.

Need help calculating your company’s ROI? Count on us!