Return on investment—ROI—is a term that everyone should know, whether or not they are in business. It applies to any financial investment you make, from purchasing a home to getting a degree. However, many people struggle to understand this term. To help, we will go over the key things you need to know about ROI.

What Is Return on Investment?

What Is Return on Investment?

The Basic Definition of Return on Investment

Return on investment refers to ratio of net profit to cost of investment. For example, if you invest one dollar in something and get four dollars back, your ROI is 3:1. This is one of several ways to compare investment to profits. While the definition of ROI is often framed around a ratio, it is frequently expressed as a percentage.

How to Calculate Return on Investment

A high ROI indicates that the gains from the investment are favorable when compared to the cost of the investment. A low ROI indicates the opposite. The basic formula to calculating ROI is to divide the net profit from an investment by the cost of the investment. If you are uncomfortable working out the math yourself, you can use free ROI calculators online that will do the work for you.

Problems with Relying on Return on Investment to Measure Monetary Success

Because ROI strictly compared the money gained to the money spent, it doesn’t really offer you a complete picture. For example, it does not take into consideration the amount of time that passes between the initial investment and the ultimate profit. You might compare two investments and see that one made twice as much as the other, deciding that the one that made twice as much is clearly the smarter investment. But if that investment takes four times as long to generate that profit, it may not actually be the smarter choice for you.

Other Problems with Return on Investment as a Metric

Something else to consider is that not all returns on your investment are monetary. This is especially true in influencer marketing. If you measure the success of an influencer campaign simply by the monetary profit it generates, you miss a lot. These campaigns also bring you new followers, develop brand loyalists, get clicks and other interactions. All of these elements matter and are also returns on your investment, but they are not measured by ROI.

Another aspect that is not accounted for are the things you invest besides capital. What about your time and effort, for example? Sometimes the profit isn’t worth the effort, even if you see returns on that investment.

All of this means that while ROI is an important metric, using it alone will not give you the full picture you need.

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March 23, 2018

What Is Return on Investment?

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