What Is ROI and How to Calculate It for Business Decisions?
In an increasingly competitive market with minimal room for error, making decisions based on data isn’t optional—it’s the foundation of responsible management. Among all metrics, ROI (Return on Investment) stands out for its simplicity and usefulness when measuring whether an investment is truly worth it.
In this article you’ll learn what ROI is, how to calculate it, its advantages and limits, and how to use it in real decisions—from marketing campaigns to buying equipment or entering new markets.
What Is ROI?
ROI measures the profitability of an investment relative to its cost. Put simply, it answers: “How much do I earn compared to what I invested?”
A positive ROI means profit; a negative ROI means loss. Quick example: if you invest €10,000 in advertising and generate €15,000 in attributable sales, the investment produced a net return—therefore, a positive ROI.
ROI Formula
ROI = (Net Profit / Investment) × 100
- Net Profit = Attributable Revenue − Investment Costs
- Investment = Everything invested (money, tools, services, etc.)
Example
- Investment: €5,000
- Attributable revenue: €7,500
- Net profit: €7,500 − €5,000 = €2,500
- ROI: (€2,500 / €5,000) × 100 = 50%
For every euro invested, you earned €0.50 extra.
Why Is ROI Important?
- Informed decisions: helps prioritize where to allocate resources.
- Comparability: allows you to evaluate alternatives and choose the most profitable one.
- Efficiency: measures your ability to convert investment into results.
- Common language: understood by executives, investors, and teams.
ROI Applications by Area
Marketing and Advertising
Key for evaluating campaigns (Google Ads, social ads, email, affiliate).
Example
- Investment: €2,000
- Attributable sales: €6,000
- Net profit (assuming a 100% margin to simplify): €4,000
- ROI: (€4,000 / €2,000) × 100 = 200%
Human Resources
Training and wellbeing programs can boost productivity and reduce turnover. ROI helps estimate the economic impact of those improvements.
Technology
Management software, automation, or analytics: if they reduce costs or speed up revenue, ROI helps justify the investment.
Market Expansion
Opening an office, entering another country, or launching a new line: projected ROI guides the order and pace of expansion.
How to Calculate ROI Step by Step
- Identify the total investment. Include direct and indirect costs: licenses, fees, staff time, implementation, maintenance.
- Calculate attributable revenue. Isolate what comes directly from the initiative (use tagging, attribution models, cohorts).
- Get net profit. Attributable revenue − investment costs.
- Apply the formula. ROI = (Net profit / Investment) × 100.
ROI Limitations (and How to Cover Them)
- It doesn’t account for time. A 20% return in 1 month isn’t the same as 20% over 5 years. Complement with IRR or Payback.
- It doesn’t measure risk. Two projects with the same ROI can have very different volatility. Add risk analysis and scenarios.
- Attribution can be difficult. Especially in multi-channel marketing. Use attribution models and clear time windows.
- It may ignore cash flow and margin. Work with contribution margin and cash flows, not just gross revenue.
ROI vs. Other Metrics
| Metric | What it measures | Advantage | Limitation |
|---|---|---|---|
| ROI | Profitability relative to investment | Simple and comparable | Doesn’t include time or risk |
| IRR | Annualized return (time value of money) | Compares projects over time | More complex to calculate |
| Payback | Time to recover the investment | Useful for liquidity | Doesn’t measure total profitability |
| ROE | Return on shareholders’ equity | Owner-focused view | Not applicable to every investment |
| ROAS | Ad revenue / ad spend | Fast for campaigns | Doesn’t subtract non-ad costs |
Practical ROI Examples
Case 1: Buying Equipment
- Investment: €100,000
- Annual savings: €30,000
- Horizon: 5 years → Total savings: €150,000
- Net profit: €150,000 − €100,000 = €50,000
- ROI: (€50,000 / €100,000) × 100 = 50%
Case 2: Social Media Marketing
- Investment: €3,000
- Additional sales: €10,000
- Margin: 40% → Gross profit: €4,000
- Net profit: €4,000 − €3,000 = €1,000
- ROI: (€1,000 / €3,000) × 100 = 33.3%
How to Improve ROI
- Cut unnecessary costs without compromising quality.
- Optimize processes with technology and standardization.
- Focus on high-impact levers: prioritize initiatives with stronger upside (pricing, product mix, best-margin channels).
- Track clear KPIs and review weekly/monthly.
- Increase LTV and reduce CAC: retention, upselling, segmentation.
- Test small before scaling (A/B pilots).
- Kill what isn’t working early and reallocate resources.
ROI in Strategic Decisions
ROI shouldn’t be the only metric—but it should be one of the main ones for prioritizing projects and allocating resources. Avoid investing based on intuition or trends: estimate expected ROI, build scenarios (base, optimistic, pessimistic), and set minimum thresholds to move forward or stop.
Key Takeaway
ROI is a simple, powerful metric to answer: “Is it worth investing here?” Use it alongside other metrics (IRR, Payback, risk) and a solid measurement system. Measuring and improving ROI is a strategic advantage for growing profitably and sustainably.
If you need to calculate, compare, or improve the ROI of your initiatives, I can help you structure the analysis and turn it into high-impact decisions.