ROI, or Return on Investment, is a financial metric that calculates the profitability of an investment by dividing the net profit by the initial cost.
What does ROI mean?
Return on Investment (ROI) is a financial performance metric used to evaluate the efficiency of an investment or compare the efficiency of several different investments. It measures the return on an investment relative to its cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. This metric is widely used in business and finance to assess the profitability of an investment, making it easier for investors and business managers to make informed decisions about where to allocate resources for the best financial returns.
| Abbreviation | Meaning | Using by | Year coined |
| ROI | Return on investment | Business | Early 1900s |
Examples of ROI
Example 1:
An e-commerce company spends $2,000 on a Facebook ad campaign to promote eco-friendly kitchen products and generates $8,000 in sales. The ROI for this digital marketing effort is calculated as ($6,000 net profit / $2,000 investment) * 100, resulting in a 300% return. This high ROI indicates the campaign’s success in leveraging digital marketing to boost sales effectively.
Example 2:
A law firm invests $1,500 in Google Ads to promote its legal services. As a result, they attract clients who generate $4,500 in service fees. The ROI is calculated as ($3,000 net profit / $1,500 investment) * 100, yielding a 200% return, demonstrating the effectiveness of using Google Ads to enhance visibility and attract clients in a service-based industry.
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