What is return on investment?
Return on Investment (ROI) is a term frequently used in marketing to determine how effective a marketing campaign has brought in new business.
The business activity’s return on investment is determined by comparing the amount invested upfront to the amount earned.
The return on investment could consider how much time and effort was put into the activity and measure how efficiently you employed your resources.
One of the essentials to examine while making business decisions is the return on investment. To be sure that you are investing in the good things, you need to calculate your return on investment.
The Importance of The Return on Investment Metric
Because of its versatility and simplicity, Return on Investment is a popular metric. Essentially, the return on investment return on investment can be used as a crude indicator of an investment’s profitability. This could be the return on a stock investment, the expected return on a manufacturing expansion, or the return on a real estate deal.
Furthermore, return on investment calculations are straightforward and can assist an investor in deciding whether to pursue or pass on an investment opportunity. You may also use the method to determine how well an investment has performed thus far. When an investment generates a positive or negative return on investment, it can provide vital information to the investor about the worth of their investment.
Using a return on investment formula, an investor may distinguish between low-performing and high-performing assets. Investors and portfolio managers might use this strategy to optimize their investments.
The math itself isn’t overly complicated, and it’s simple to interpret for a wide range of applications. If the return on investment is positive, the investment is beneficial. These indications can assist investors in rejecting or picking the best opportunities with higher ROIs available. Avoid negative ROI, which indicates a net loss.
How To Calculate Return On Investment
Consider the following scenario: your company decides to launch a digital marketing campaign to coincide with the release of a new product. You choose to use Google pay-per-click advertising as your primary marketing channel, and you set a monthly budget of $5,000.
After running this campaign for three months, you evaluate your sales and discover that you have secured 7,000 dollars in sales due to the PPC campaign. Assuming your product costs $10 and you have a 50% profit margin, you will earn $5 from each sale, for an overall net profit of $30,000 from all sales.
As a manager, you can calculate the Return on Investment by subtracting your marketing expenses from your profit. In this case, it’s straightforward.
$30,000 minus $15,000 equals $15,000
Congratulations, you have more than doubled your initial investment!
Essentially, you’re getting $2 back for every $1 spent, for a total return on investment of 100 percent.
Return on investment (ROI) is also used to determine how you may have invested in stocks and shares intelligently.
In the example above, if you opted to purchase 1,000 shares of a stock for $10 per share and then sold those shares a year later for $12 per share, you would have made $12 for every $10 you spent, or $1.20 for every $1.20 you spent. For this calculation, your return on investment equals 20 percent because you have earned back your initial investment plus an additional 20 percent.
You can calculate your return on investment by using the formula below:
((net return on investment) – (cost of investment)) / (cost of investment) x 100 = ((net return on investment) – (cost of investment))
As a result, the $12,000 return on investment less the $10,000 cost equals $2,000 in profit.
This is then divided by the investment cost ($10,000), yielding a result of 0.2.
Finally, multiply this figure by 100 to obtain a return on investment of 20 percent overall.
When estimating Return on Investment, there are several difficulties to consider.
Unfortunately, things are not always as simple as the examples provided above. Calculating return on investment can be difficult if the costs and benefits are not clearly defined.
Broker fees and dividends are important considerations when investing in stocks and shares. In the world of marketing and advertising, costs can change rapidly and substantially (for example, you may need to engage an expert to help you create your campaign), increasing the overall cost of the campaign.
Finally, calculating the return on investment for various marketing methods might be tricky. For example, when it comes to television, print advertising, and SEO, you can’t track results as quickly as you can with digital platforms.