What is return on investment (ROI)? Return on investment is a financial metric identifying the benefit expected from a specific expenditure. You can calculate ROI before you invest to determine your potential benefit. Alternatively, you can determine ROI after you have some results to decide about continued funding.
In business, it’s wise to assess ROI for programs and functions that require significant funds, such as marketing or customer service. ROI is a critical metric that can help you prioritize spending. You can also use ROI to help build a business case for new initiatives that require executive buy-in.
Common uses for ROI
- Measure expected profitability of a stock investment
- Assess whether acquiring a business is worthwhile
- Compare the performance of several business functions, such as marketing, customer service, and sales
- Determine the payback from investing in a planned business improvement program
- Identify successful business initiatives that are worthy of continued investment
ROI calculation example
The basic ROI formula is simple, but you need to gather some data for the calculation. First, you need to derive the benefits for the investment. This can be a bit tricky if you’re estimating future benefits. Base your estimates on actual data whenever possible.
Next, you’ll need the total investment cost. If you’re looking at a business program, make sure you consider all the costs. For example, if you want to implement new customer service software, you may have human resources, training, and technology costs.
Now, you are ready to put your data into the ROI formula:
ROI = 100 x (Benefits – Investments) / Investments
Let’s imagine that you’re adding a chat function to your website to improve customer service. You expect to gain $150,000 in benefit for the quarter, but you’ll need to spend $50,000 to put the program in place.
Your ROI calculation will look like this:
ROI = 100 x ($150,000-$50,000)/$50,000
ROI = 100 x ($100,000/$50,000)
ROI = 100 x (2)
ROI = 200%
By calculating ROI, you can clearly show the business benefit of a planned investment. You can use this data to secure the funding and executive support you need to make it a reality.