ROI stands for Return on Investment and it is a metric used in business to measure how profitable an investment was. If you invest money in advertising calculating your ROI will tell you whether it was a good investment and you can use that data when deciding on future investments. If you have a positive ROI, that indicates a good investment where a negative ROI indicates a bad investment.
To calculate ROI, you divide Net Profit by the Cost of the Investment (COI). Net Profit is the profit generated by an investment after subtracting out the total cost of that investment.
Example ROI Calculation:
- You invest $2,000 in a Google Ads
- The Ads campaign generates $4,000 in net profit
ROI = ($4,000/$2,000) * 100 = 200%
In this scenario, you earned $2 for every $1 spent which indicates a positive ROI and that you made money from your investment. Knowing that this investment brought in a positive ROI can help you make better decisions about ads in the future. Maybe, if you invest more in the same ad campaign, it will generate more money (of course there are a lot of other factors to consider but in simple terms a positive ROI can indicate a place where you should invest more money).
Unbelievably, I’ve worked with a lot of businesses over the years who either didn’t pay any attention to ROI, or they were calculating it incorrectly. One common problem I’ve seen is using Gross Sales instead of Net Profit when calculating ROI, which will skew ROI in a positive direction. Net profit is the number you want to use to get an accurate ROI number.
A positive ROI indicates profit while a negative ROI indicates a loss. A higher positive ROI indicates better performance. ROI provides valuable information, but it should be used along with other metrics to get a full picture of what is going on.
In a seasonal business, the ROI might be positive on an ad campaign when run “in season” but negative when run “out of season”. The campaign itself might be good, but the timing is bad. You can’t always just look at ROI by itself, it’s best to use it along with other data points when analyzing performance or planning future investments.