Return on Investment Definition
Return on investment, abbreviated ROI, is a financial performance indicator generally used to evaluate the profitability of an investment or to compare the efficiency of different investments. It measures the financial gain of an investment in relation to its cost. In short, it helps us understand whether an investment is worth the money.
Formula and calculation of ROI
ROI is typically calculated as a percentage and gets its formula too:
(Gewinn aus der Investition - Kosten der Investition) / Kosten der Investition * 100%
The profit from the investment is the amount you earn in profit from the action you invested in, while the cost of the investment is the amount you spent.
Application of ROI in marketing
In the context of growth marketing, where we think about how to accelerate the growth of our brands, ROI can help evaluate the profitability of different marketing campaigns. For example, after defining our target audience and creating our buyer persona, we could apply different marketing strategies and calculate the ROI to find out which one was most effective.
Why is ROI important in marketing?
ROI is a critical tool for business decisions, as it helps us identify profitable investment opportunities and avoid inefficient ones. For example, if after analyzing the competition we determine that a particular marketing strategy is not producing the desired return on investment, we might decide to focus our efforts elsewhere.
It is also a useful tool in the process of market research, where it helps us to understand what potentials a market offers and how profitable possible investments in this market could be.
The ROI and other marketing metrics
ROI is an important metric, but it’s not the only one used in marketing. Other key metrics include retention rate, customer lifetime value, and conversion rate.
Each of these metrics has its own value and can show us different aspects of marketing success. Using ROI along with these other metrics can give us a balanced picture and help us make informed decisions.
Summary
So always look at ROI in the context of an overall strategy and use it in conjunction with other metrics to get a holistic picture of your marketing efforts. After all, the success or failure of an investment cannot be judged solely on the basis of a single metric such as ROI. It is a useful tool to provide an initial indication of overall success, but should always be supported with a more thorough analysis from other perspectives.
