ROI (return on investment)
ROI (return on investment) is a metric that shows how much profit an investment brought in relation to its cost. It is calculated by dividing net profit by the cost of the investment, and the result is usually given as a percentage. An ROI of 50% means that every dollar spent came back with 50 cents of profit. In online marketing, ROI is used to judge whether an advertising campaign, e.g. in Google Ads, makes the business a profit. The metric is simple, but it does not take into account the length of the investment or its risk.
What is ROI?
ROI is a financial metric that compares the benefit of an investment with its cost. Corporate Finance Institute describes it as a measure of the benefit an investor receives in relation to the cost of the investment.
| Feature | Description |
|---|---|
| Full name | return on investment |
| Polish name | zwrot z inwestycji, stopa zwrotu z inwestycji |
| Type | profitability ratio |
| Result | usually a percentage |
| Positive result | the investment made a profit |
| Negative result | the investment made a loss |
| Use | finance, investing, marketing, online advertising |
According to Google Ads Help, ROI is the ratio of net profit to costs. Google describes it as usually the most important metric for an advertiser, because it shows the actual effect of advertising on the business.
How do you calculate ROI?
ROI is calculated by subtracting the cost of the investment from the revenue and dividing the result by the cost of the investment. To get the result as a percentage, it is multiplied by 100%.
ROI = (revenue – cost of investment) / cost of investment × 100%
Google Ads Help gives the example of selling a product that costs 100 dollars to make and sells for 200 dollars.
| Item | Amount |
|---|---|
| Products sold | 6 units |
| Sales revenue | 1200 USD |
| Cost of making the products | 600 USD |
| Google Ads cost | 200 USD |
| Total cost | 800 USD |
| Net profit | 400 USD |
| ROI | 400 / 800 = 50% |
According to Google, this means that every dollar spent brings back 1.50 dollars. Corporate Finance Institute also gives the example of a property bought for 500,000 dollars and sold two years later for 1,000,000 dollars. The ROI is then 100%.
For investments lasting several years, CFI gives a formula for annualized ROI. It makes it possible to compare investments of different lengths.
Annualized ROI = (ending value / beginning value)^(1 / number of years) – 1
How is ROI calculated in online marketing?
In online marketing, ROI shows how much a business earned from advertising after subtracting all costs. According to Google, the way it is calculated depends on the campaign goal.
| Type of business | Cost in the ROI formula | Revenue in the ROI formula |
|---|---|---|
| Selling physical products | cost of making the products sold plus advertising cost | revenue from selling those products |
| Lead generation | advertising cost | average value of a lead |
Google gives the example of a business that gets one sale worth 20 dollars from 10 leads. Each lead is then worth 2 dollars on average.
Calculating ROI requires conversion tracking, i.e. tracking valuable customer actions such as a purchase, a sign-up or a contact. Google Ads has a free conversion tracking tool for this. According to Google, many advertisers also track conversions in Google Analytics.
According to Google, ROI also helps allocate the budget. Campaigns with a higher ROI can get more money, and weaker ones less.
How is ROI different from ROAS?
ROI takes all costs into account, while ROAS (return on ad spend) covers only advertising spend. ROAS is the ratio of conversion value to advertising cost.
| Feature | ROI | ROAS |
|---|---|---|
| What it measures | net profit in relation to all costs | revenue in relation to ad spend |
| Formula | (revenue – costs) / costs × 100% | conversion value / ad cost × 100% |
| Product costs | included | not included |
| Google's example | 50% with 1200 USD revenue and 800 USD costs | 500% with 5 USD in sales per 1 USD spent |
Google Ads uses ROAS in the “Target ROAS” bidding strategy. The system tries to keep the average conversion value relative to cost at the level set by the advertiser.
A high ROAS does not have to mean a profit. A campaign with a ROAS of 200% can be unprofitable if the cost of making the products is high. That is why ROI shows the actual financial result better.
What are the limitations of ROI?
ROI is simple and widely understood, but it has limitations. Corporate Finance Institute lists three main ones.
| Limitation | What it means |
|---|---|
| Ignores time | a higher ROI does not always mean a better investment if it took longer |
| Ignores risk | a higher potential return usually comes with greater volatility |
| Open to manipulation | the result depends on which costs the person calculating it includes |
CFI points out that people calculating ROI may leave out, e.g., maintenance costs, taxes, fees or legal costs. The results of different investments are then not comparable.
In marketing, there is also the problem of conversion attribution. ROI depends on which sales can be linked to the campaign. Without conversion tracking, Google notes, it is hard to judge whether advertising makes a profit.
Frequently asked questions
Q.What is a good ROI?
There is no single value considered good. Any result above 0% means the investment made a profit, and a negative result means a loss. The assessment depends on the industry, the length of the investment and the risk. Corporate Finance Institute notes that a higher potential return usually comes with greater volatility of results.
Q.Can ROI be negative?
Yes. A negative ROI means that the costs of the investment exceeded the revenue, i.e. the investment made a loss. For example, an advertising campaign that cost 1000 PLN and brought in 800 PLN of revenue has an ROI of minus 20%. Such a result can be a signal that the campaign should be changed or the budget moved.
Q.How is ROI different from ROAS?
ROI takes all costs into account, e.g. the cost of making the product and of advertising. ROAS compares revenue only with advertising spend. In Google's example, 5 dollars in sales for 1 dollar spent gives a ROAS of 500%. A high ROAS does not guarantee a profit, though, because it does not include product costs.
Q.How do you calculate the ROI of a Google Ads campaign?
Total costs are subtracted from the campaign revenue, and the result is divided by those costs. When selling products, costs include making the goods and advertising. In lead generation, the cost is the advertising alone, and the revenue is the average value of a lead. This requires conversion tracking in Google Ads or Google Analytics.
Q.What sources is this description based on?
The definition of ROI in advertising, the formula and the calculation example come from the Google Ads Help article “About return on investment (ROI)”. The same article describes calculating ROI for leads. The definition of ROAS and the Target ROAS example are described in the Google Ads Help article “About Target ROAS bidding”. The general definition of ROI, the annualized formula, the property example and the metric's limitations come from the Corporate Finance Institute article “Return on Investment”.
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