What is Return on Investment (ROI)?
Return on investment (ROI) is a performance measure used to evaluate the efficiency of an investment. ROI tries to directly measure the amount of return on a particular investment relative to the investment’s cost.
For companies, ROI is commonly used to analyze how efficiently capital is used to generate profits and value. It is an indicator of the extra value that has been created over a period of time compared to the initial investment made over that time. Individuals can also use ROI to evaluate purchases and investments or compare expenditures.
A Simple ROI Formula
The most common way to calculate ROI is to divide net profit by total investment cost. Here is the formula:
ROI = (Net Profit / Total Investment Cost) x 10
For example, if you invested £1000 in new software for your business and it generated $5000 in profits, the ROI would be:
ROI = ($5000 / $1000) x 100 = 500%
This means that for every $1 invested, there was $5 in return, which is a 500% ROI.
While this is the most common calculation, there are also other variations on ROI formulas that may factor in additional costs like maintenance, taxes and fees. The key elements needed are the net profit amount (the return) and the total costs (the investment).
Why is Return on Investment (ROI) important to measure?
Here’s why measuring and analyzing your ROI can be beneficial:
- Evaluating performance: it indicates whether an investment was effective and profitable and if this should be continued in the future. Was this investment spent wisely?
- Cost-effectiveness: it allows comparisons between different investments to see which have over and underperformed and reallocate the budget accordingly. Which investment performed best?
- Future decision making: analysing ROI on different investments over a long period helps guide where to put resources going forward. Where should we spend our money next year?
- Communicating performance: tracking ROI enables companies to communicate the performance of their investments to stakeholders such as leadership teams, shareholders, and investors.
ROI in Marketing
Marketing ROI specifically measures the investment your company spends on marketing activities against the revenue those activities generate.
Whether you want to analyse how successful an event has been, determine which cost-per-click keywords are performing best, or what social media campaign to continue – ROI is a critical measurement for B2B and B2C marketing teams.
Tracking ROI over time also shows the impact of marketing activities. Improving ROI year-over-year indicates marketing is becoming more efficient at converting spend to revenue.
How Taggstar can transform your ROI
In the world of eCommerce, retailers and brands look for technology providers and their solutions that drive proven ROI. As the leading expert in enterprise social proof messaging, Taggstar helps retailers and brands deliver more dynamic and engaging shopping experiences, build customer trust and increase online conversions and profitable sales.
Powered by machine learning, the Taggstar platform offers scalable real-time social proof solutions, including social proof messaging, social proof recommendations and attribute messaging.
Want to know how much revenue Taggstar can deliver for you? Use our conversion calculator or contact us to find out.
