What is Return on Investment (ROI) & How to Calculate It

What is Return on Investment (ROI) & How to Calculate It

4 Min Read

Every business wants to thrive. One of the most insightful and efficient ways of measuring a company’s health is Return on Investment (ROI).

What Is Return on Investment?

Return on investment (ROI) is the ratio of your profit or loss divided by your investment. It can be specific to a particular investment, like your performance marketing spend, or based on your entire business investment, including property and equipment.

Why Is Return on Investment Important?

ROI is a necessary calculation to evaluate if a company’s performance is on the right track. While some other key performance indicators (KPIs) look at smaller units of a company’s success, ROI is the big-picture indicator of a company’s (or a marketing campaign’s) success.

For the ROI to be meaningful, items such as customer retention and churn, the number of Marketing Qualified Leads (MQLs) vs. Sales Qualified Leads (SQLs), and the Cost Per Click of its advertising or the Cost Per Acquisition should factor in the equation for ROI.

Monitoring ROI can determine if a company’s long-term and short-term health is viable, if the business direction is appropriate, and provide valuable feedback regarding its overall strategy.

Sometimes, the results of this check-in can be surprising. According to Nielsen, for example, some companies are underspending in specific areas in the pursuit of a good ROI but would, instead, be better off spending more on their marketing budgets. 

A good marketing ROI means, in simple terms, that your company’s strategy is a successful one. A bad ROI means a course correction is necessary.

How to Calculate Return on Investment

ROI is calculated using the following formula:

Return on Investment = (Net income / Cost of investment) x 100

Expressed in terms of a percentage, the ROI can change minimally depending on specific inputs but is always tied to the bottom line: what return you make given your investment dollars.

An Example of How It’s Used

ROI is used to determine if an investment is being used most effectively and efficiently as possible. For example, an expensive marketing campaign is a poor investment if the ROI is too low. A company may decide then to switch to a cheaper ad campaign that generates better results—as, indeed, many companies have pivoted from lavish campaigns to User Generated Content (UGC), which is both more affordable and authentic.

Conversely, a good ROI lets you know your company’s marketing strategy is on the right track.

ROI, calculated for specific campaigns and conversion goals, is used to judge the value of a company’s particular initiatives. 

What Is a Good Return on Investment?

A good ROI depends on the benchmarks set by a company, the expenditure outlay, and whether that amount is sustainable. According to Nielsen, the average ROI is 9% within three months of an ad campaign. Longer-term ROIs may increase as ad campaigns resonate with the public beyond their initial launch. Online ads show a much greater return (over 200%) than the average.

Some companies may be satisfied with any ROI that returns more than they spend on marketing. How you determine your ideal ROI may depend on the age of your company and the industry you operate in (to name two factors). Of course, businesses are looking to maximize their ROI. At the same time, they may want to account for factors like the human resources involved in a marketing campaign and opportunity costs in pursuing a particular marketing project.

Return on Investment: Final Thoughts

Calculating ROI can be as much an art as a science. You can define “investment” in a granular fashion to see which parts of your marketing spend are paying off. 

MNTN knows what it takes to launch a successful campaign and ensure your marketing ROI is positive. MNTN takes the budget that you have and puts it to work in the optimal way to drive performance without advertisers having to make manual adjustments along the way. And if your ROI isn’t what you want it to be, MNTN’s innovative CTV advertising platform uses machine learning to iterate its campaigns until the ROI is what you want it to be.

Ultimately, a good marketing ROI means a good overall bottom line for your business. Reach out to MNTN today to find out if your marketing budget investment is as agile and efficient as possible so you can create the best return possible for your business.