Return on investment (ROI)

How to figure ROI?

Return-On-Investment Calculator 

The return on investment (ROI) that a business experiences refers to how much of an increase in profit the business gains as a result of a purchase, advertisement or other investment expense. While many ROI calculations are intended to show the effect of a single expense or company action, ROI can also be figured to show the return on a long-term expense such as a multiyear investment plan or long-term marketing campaign.

Function

Businesses track the returns on their investments to determine whether the money spent on the investment actually produced a profit or if it caused the business to experience a financial loss. The ROI not only helps the managers and financial officers of the business to determine whether or not the expense resulted in a profit, but also plays a large part in budgeting for future marketing and other expenses. If the company has experienced negative returns on past investments, potential future investments are unlikely to receive as much funding until it is proven that they can provide a positive return.

Multiyear Investments

While purchases and individual advertisements are likely only to require a single expenditure, long-term expenses such as marketing campaigns and employee-training programs may require additional funding for months or years after the initial payment on the investment is made. Because of this, it may take years before the actual return on the investment can be calculated. Data from the entire investment period are needed to calculate the total ROI.

Calculating Profit

Before the return on a multiyear investment can be calculated, the profit that resulted from the investment must be calculated. This is determined by adding the total gross profit that resulted from the investment. Then determine the total investment amount spent over the course of the investment, including any fees or other costs associated with the investment. Subtracting the investment amount from the gross profit for the period provides you with the actual profit for the investment period.

Collect Your Advertising Data

During your sales campaign, regularly collect data on the promotion. For example, if it is an online campaign, record data on the number of daily impressions and clicks the campaign delivers. If it's a print campaign, get data on the circulation and distribution of the campaign. Before your sales promotion runs, target your advertising vehicles based on a target audience profile and the sales goals you wish to accomplish.

Analyze Your Return

Determine results of your sales promotion as they relate to your business. For sales promotions, the most obvious measure of return is revenue generated from the promotion. Review your sales numbers to determine the amount of sales that resulted from your promotion. In order to get a more accurate view of how many sales were a direct result of the campaign, use trackable sales methods in your ad. For example, use unique website landing pages or phone numbers in the ads so you can directly track the number of sales that result from these channels. Once you know the amount of sales revenue that results from your promotion, determine your gross profits from those sales by subtracting the cost of the goods sold from your revenue. For example, if you sell a shirt for $10, but it costs you $3 to buy it, when you sell 10 shirts, your revenue is $100, but your profit is $70.

Determine Your Total Campaign Costs

Calculate the total cost to run the sales promotion. Track these expenses from the onset of the project to get an accurate account of expenditures. Costs could include the sales promotion purchase price, freelance or design fees, and any employee time or resources put into the complete sales promotion process.

Calculate Your Return on Investment

Calculate your return on investment for the campaign by subtracting your sales promotion total cost from your gross profits, dividing that number by your sales promotion cost and then multiplying that number by 100 to get a percentage. For example, if your promotion yielded $1,000 in profit but cost $500, your ROI would be 100 percent. An ROI of 100 percent means the promotion led to a profit that was twice the cost. It's important to note that this number is a profit in relation to the total expenses of the campaign. The "return" in the ROI equation is in direct proportion to the amount spent, or the investment.

Calculating ROI

Once the actual profit for the investment period has been calculated, it can be used to determine the ROI for the investment itself. The ROI is calculated by dividing the actual profit by the total investment amount and multiplying the result by 100. The resulting number is the percentage by which profit increased or decreased as a result of the investment. A positive number shows an increase in profit during the multiyear investment period, while a negative number indicates a loss during the investment period.