The Return on Investment (ROI) is a business indicator that indicates the expected cash flow from an investment. This key figure helps companies to better evaluate an investment (for example, in an advertising campaign).
The Return on Investment is calculated as follows:*
ROI = Return on sales x capital turnover
The ROI plays an important role in marketing, as it can be used to plan how much profit one Euro of investment will bring.
Example:
Investment (capital employed) for the acquisition of new customers: 50,000 €
Achieved turnover: 70,000 €
Profit = Turnover-investment = 20.000 €
ROI = Return on sales** x capital turnover
ROI = (profit/turnover) x (turnover/invested capital)
= (20.000/70.000 x 100) x (70.000/50.000) = 40%
In this example, a profit of 40 cents and a turnover of 1.40 € is made with each invested Euro.
Additional key figures related to the return on investment are the return on marketing investment and the return on advertising spend.
The Return on Marketing Investment (short: ROMI) describes the ratio of invested capital to achieved profit. The ROMI considers the total expenditure for a marketing campaign.
The ROMI is calculated as follows:
ROMI = (net sales product costs-advertising costs)/(advertising costs)
The Return on Advertising Spend (ROAS) shows the profitability of an advertising measure. It, therefore, helps to identify if a campaign is running well or if additional measures are required so that quality can be increased and costs saved.
The ROAS is calculated as follows:
ROAS = (net profit/advertising costs) x 100
When analyzing the ROI, it must be kept in mind that it only includes monetary and internal company factors. External factors, such as customer satisfaction, risks, competition, market situation or corporate image are not included. For this reason, ROI should not be used as the sole analytical indicator for evaluating company performance.
Advantages of the ROI
The ROI provides important data for:
- The planning and control of future investments.
- The analysis and comparison of individual company divisions and investment objects.
- The determination and consideration of the overall performance of a company for a prior period.
*The total capital of a company is used to calculate the ROI
**Return on sales: the relation between profit and sales within an accounting period