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Return on investment is one of the quickest ways to compare options using the same baseline: money out, money back in. We tend to shorten the term to ROI, which gives us a quick way to talk about profitability by comparing the gain (or loss) from an investment to its cost. It is usually expressed as a percentage.

It’s often used for short-term decisions like marketing spend, sales initiatives, process changes, or small operational investments. For longer-term projects with multi-year cash flows, you usually complement ROI with metrics like NPV or IRR, because timing matters.

Key takeaways

– It measures profit or loss relative to the cost of an investment.
– The basic formula is: ((gain − cost) / cost) × 100.
– It can be positive or negative and it is commonly shown as a percentage.
– It doesn’t account for time on its own, so annualized ROI or NPV/IRR can be useful for longer horizons.

What is ROI in business?

ROI in marketing

Used to evaluate campaign performance, channel mix, events, content programs or lifecycle initiatives.

ROI in operations

Used to evaluate process improvements, automation, systems changes, or efficiency projects where the “return” is cost savings or time reclaimed.

ROI in technology

Used to evaluate software, tooling, data projects, or platform changes where costs include implementation and ongoing maintenance.

ROI in people investment

Used to evaluate training, hiring programs, or productivity initiatives where returns may be tied to performance outcomes and retention.

How do you calculate ROI?

So, calculating return on investment requires two inputs: the return you attribute to the investment and the total cost of the investment.

The standard ROI formula

ROI (%) = ((Gain from investment − Cost of investment) / Cost of investment) × 100

You will also see:

ROI (%) = (Net profit / Cost of investment) × 100

Both are describing the same structure. The key is that “net profit” already reflects gain minus costs.

What counts as “gain” in ROI?

Your “gain” should match the decision you are trying to evaluate.

Revenue

Revenue can work for simple cases, but it often overstates return on investment because it ignores margin.

Gross profit

Gross profit is common for marketing ROI because it accounts for cost of goods and gives a clearer view of contribution.

Cost savings

Cost savings can be used when the investment reduces expenses, labor hours, churn, or rework. The savings need a clear baseline and a credible method.

What counts as “investment cost” in ROI?

Direct costs

Media spend, vendor invoices, commissions, fees, software subscriptions, equipment purchases.

Implementation costs

Setup, integration, onboarding, training, internal project time.

Ongoing costs

Maintenance, renewal fees, staffing requirements, operating costs linked to the investment.

ROI can be annualized when the timeframe differs

If two investments run over different time periods, basic ROI can be misleading. Annualized ROI adjusts ROI to a one-year rate using compounding.

What is an ROI example?

Simple ROI example

A team spends $20,000 on an initiative. Which means it generates $30,000 in profit attributed to the initiative over the measurement period.

  • Gain = $30,000
  • Cost = $20,000
  • Net gain = $10,000

Return on investment = (10,000 / 20,000) × 100 = 50%

ROI example using cost savings

A company invests $50,000 in a workflow automation project. Over 12 months, it avoids $80,000 in contractor costs.

  • Gain = $80,000 (measured savings)
  • Cost = $50,000
  • Net gain = $30,000

Return on investment = (30,000 / 50,000) × 100 = 60%

What is ROI in marketing?

Now, let’s take a moment to zoom in on a key area which we mentioned before – marketing. It’s a somewhat intangible practice, which is why calculating return is so important when evaluating marketing costs.

Marketing ROI can be calculated in several ways. The simplest versions use sales growth relative to marketing cost, but more careful approaches account for baseline growth and margins.

Marketing ROI formula

A common structure is:

Marketing ROI (%) = ((Incremental profit − Marketing cost) / Marketing cost) × 100

Investopedia describes a simple approach based on net increase in sales relative to marketing cost, while also noting that a more accurate method accounts for organic growth that would have occurred without the campaign.

Incremental returns and attribution

Marketing ROI depends on what you count as “incremental.”

Baseline performance

If sales were already rising before a campaign, attributing all growth to marketing inflates return on investment.

Time lag

In longer sales cycles, returns may appear after the spending window.

What you measure

Some teams measure ROI on profit, some on revenue, some on lifetime value. The method should match the decision being made.

Marketing ROI example

A company spends $10,000 on a campaign. It generates $40,000 in attributable revenue. Gross margin is 50%, so gross profit is $20,000.

Marketing ROI = ((20,000 − 10,000) / 10,000) × 100 = 100%

What is a good ROI?

What is a good ROI depends on timeframe, risk, opportunity cost, and what alternatives exist.

ROI varies by time horizon

ROI does not account for holding period on its own. A 30% ROI earned in three months is not equivalent to a 30% ROI earned over three years.

Many organizations use thresholds

In corporate finance, a “hurdle rate” is often used as a minimum required return for a project to be considered acceptable. It’s also typically set with risk in mind and often connected to cost of capital and alternatives.

Common benchmarks for marketing ROI

Benchmarks vary by industry and cost structure, but a widely used reference point is:

5:1 as strong

Several marketing references cite a 5:1 return as a strong benchmark for many businesses.

10:1 as exceptional

A 10:1 return is often described as exceptional performance.

What are the limitations of ROI?

ROI does not capture time value of money

Because ROI does not incorporate discounting, it can miss the impact of when cash flows occur.

ROI does not quantify risk

Two investments can show the same ROI with very different levels of uncertainty. But basic ROI does not adjust for volatility or downside exposure.

ROI depends on assumptions

Attribution choices, cost allocation, and forecast quality can materially change ROI results.

When should you use NPV, IRR, or payback period instead?

Net present value

NPV measures the difference between the present value of cash inflows and outflows. It accounts for time value of money.

Internal rate of return

IRR is a rate-based measure tied to discounted cash flow, commonly used alongside NPV to compare projects with different cash flow patterns.

Payback period

Payback period focuses on how long it takes to recover the initial investment. Afterwards, we often use it when liquidity and speed of recovery are priorities.

How do you improve the accuracy of ROI?

Use a defined measurement period

Choose a time window that matches how returns materialize for the investment being evaluated.

Include full costs

Include direct costs, implementation costs, and ongoing costs tied to the investment.

Separate revenue from profit when relevant

Where margins vary, profit-based ROI is often more informative than revenue-based ROI.

Document your attribution method

For marketing ROI, clarify whether you are using baseline-adjusted lift, attributed conversions, or experimental holdouts. Naturally, sources discussing marketing ROI commonly flag attribution and organic growth as key issues.

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