Return on Investment is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.
Return on investment allows an investor to evaluate the performance of an investment and compare it to others in his or her portfolio.
In other words, calculating ROI is one way of considering profits in relation to capital invested.
Lets use a (very) simplified example, Lucy is a shoe designer and she has decided to make her own shoe collection. She makes 10 pairs of shoes which costs her £900 (£90 each) to make.
After her shoe collection is complete she decides to sell the shoes online. To help promote her shoe collection she decides to invest £100 into AdWords to help advertise them. Lucy’s total cost of investment is £1000.
Lucy sells all 10 pairs of shoes for £300 each, this makes her £3000.
Lucy needed to do this calculation to determine whether her investment was worthwhile. Lucy’s return on investment is 200%, this shows that her ROI was worthwhile and has benefited her shoe business.
By calculating the ROI, Lucy has learnt how much money she has made selling her shoes.
Please keep in mind that the definition of the term explained in this post is very broad and simplified, it just attempts to measure the profitability of an investment. If you’re a business, knowing your ROI is very important but you have to remember that there are many more factors to consider when making business decisions. Marketers should understand the position of their company and the returns expected.