What is the return on investment?
The Return on Investment (ROI) is one of the most important key figures in marketing. It puts the profit generated in relation to the capital employed and is usually expressed as a percentage. However, the ROI (return on investment) or return on capital can also be used to make a statement about when the company starts making profits with the capital employed.
- Indicates the profitability of enterprises
- Refers to a certain period
- Is usually a percentage or a factor
What the return on investment says
Generally it can be said that with the help of the ROI it is examined how much an investment of a company has been worthwhile, or the return on investment reflects numerically the profitability of an individual company. Already the literal translation – return on investment – shows what this important business term is all about. Of course, this key figure is also of great importance in marketing, because after all, a marketing campaign should also be profitable. As a rule, the ROI or return on investment is given as a percentage, in some cases also as a factor. Two examples of this: 130 % corresponds to a factor of 1.3 and 60 % corresponds to a factor of 0.6. The return on investment always refers to a defined period, for example one year. Even if the definition or formula may seem quite simple at first, the reality is often quite complex in terms of ROI, because different factors can influence the return on investment. In the end, however, ROI can even be used to define the profitability of an entire company in terms of a single objective key figure. Quite a few companies use quite attractive ROI figures as sales promotion tools. But the return on investment may be less suitable for certain forecasts. For example, the ROI does not provide information about the risks of investments
ROI measures the economic success of campaigns
This significant value provides marketers with a metric that primarily measures the financial effectiveness of various marketing activities. The ROI can be used both to evaluate the marketing measures and to set targets. After all, it is always important in marketing that, for example, an advertising budget is transformed into a profit within the shortest possible time. ROI proves to be very practicable, especially for campaigns whose success is constantly monitored. In some definitions or encyclopaedias, the return on investment is also understood as an expression that views the profit achieved as a percentage of the sum invested. For clients as well as marketers, this ratio is a fairly solid basis for bonus payments or budget negotiations. Traditionally, ROI is often calculated by multiplying capital turnover and return on sales. The return on sales is the profit divided by sales, the capital turnover is calculated by dividing sales and invested capital. Other important key figures in the ROI environment are the Payback Period (PBP), the Net Present Value (NPV), and the switching and opportunity costs. For example, in case of doubt, the project with a shorter PBP will be chosen if two alternative projects are equally urgent and have a similar ROI. Return on investment is therefore a fairly reliable indicator for monitoring whether investments are worthwhile or not. ROI as a mathematical quantity puts investments and profits into measurable proportions and allows marketing to make good predictions about the time periods in which investments will pay off. The return on investment can also be applied across industries