What is return on investment (ROI)?
Return on investment (ROI) measures the profit or loss generated on an investment relative to the amount of money invested.
How to calculate return on investment (ROI)?
To calculate return on investment, divide the ‘net income’ generated as a result of the investment (gain - cost) by the ‘total cost of the investment’. Now multiply this number by 100 to get a percentage ROI.
Keep in mind that the ROI formula is a general guideline and can be modified to fit specific circumstances.
Formula for calculating return on investment (ROI)
Real-life example of return on investment (ROI)
Let’s say you run an eCommerce business and you invested in a new piece of online equipment for your business. Say, purchasing the system cost you $10,000 and it generated $15,000 for your business. Then, your net income/profit will be $5,000 (15,000 - 10,000)
Then, ROI will be: 5,000/10,000 x 100 = 50%
This means that you made a 50% return on your investment.
What’s considered a good return on investment (ROI)? (benchmark)
The definition of a "good" ROI (return on investment) will vary depending on the company making the investment, the industry, and their specific goals and circumstances.
In general, however, a good ROI is considered to be any return on investment that is higher than the minimum required rate of return.
A good ROI is one that provides a satisfactory balance of risk and returns for the investor. It is important to carefully evaluate all potential investments and consider factors such as the potential risks and rewards before making a decision.
Ways to increase your return on investment (ROI)
- Reduce operating costs: Identifying and reducing unnecessary expenses can help increase the profitability of a business. For example, a company might implement more efficient processes to reduce labor costs and rely on modern approaches.
- Increase your sales: Increasing sales is an obvious way to increase ROI as it will push your ROI ratio higher. This can be done through a variety of methods, such as marketing and advertising campaigns, offering promotions and discounts, or expanding into new markets.
- Invest in technology: Investing in technology can help a business automate processes, reduce errors, and improve efficiency. This can save the business time and money, which can increase its overall ROI.