What is ROI and How Is It Calculated?

What is ROI and How Is It Calculated?

Mark Herbert

What is ROI and How is it Calculated_

Today’s question: what is ROI and how is it calculated?

The ultimate goal and bottom line for any business is growth. When a business makes an investment in a loyalty program, for example, in the hopes of boosting sales and gaining business, ROI is a standard metric, making sure their goals are accomplished and the business stands to profit before they continue to allocate funds.

But before we dive into the details of loyalty program investments, let’s take a step back and focus on today’s question: what is ROI, and how is it calculated? Check out our infographic below for an introductory lesson on the concept and calculation of ROI.

Infographic: What is ROI and How is it Calculated?

What is ROI and How is it Calculated_

Simply put, “ROI” stands for “return on investment,” and is known as a performance metric used to measure the efficiency of an investment.

As notated by the formula in the infographic, subtracting the introductory cost of an investment from its current value is the first step, and produces what is known as the “net profit” of the investment. Right away, if the net profit is below zero, this will result in a negative percentage of ROI, implying a loss on this particular investment.

Once the net profit is determined, the formula calls to then divide the net profit by the total cost of the investment. This number is then multiplied by 100 to calculate the final percentage of ROI.

What are the Benefits of Calculating ROI?

Most businesses do not have an endless supply of funds to invest and yield a negative return. Because ROI is calculated as a percentage or ratio, it can be used for easy comparison to alternate forms of investment to guide future investment activity.

While there are often multiple factors that contribute to an investment’s overall ROI, this formula is the most rudimentary when confirming whether an investment was, or still is, in the best interest of a business.

Variations of ROI

While this formula provides access to numerical proof of an investment’s worth, not all investments are as easily simplified.

The key is determining the desired outcome of the investment and making sure to identify the key performance indicators, or KPI’s, as well as how these will be measured.

In the world of finance, investments are used simply to yield an increase in profit, making ROI calculation dependent on the total funds earned since the purchase of the investment.

Investments made not for the sole purpose of increased profit include social ROI or investing in order to benefit society, as well as environmental investments, such as investments made in recycling and energy conservation. While these investments might not result in an obvious yield, defining the desired social and environmental benefits and determining how to measure those will determine the effectiveness of these investments.

When it comes to investing in a loyalty program, marketing statistics ROI is commonly calculated to see how effective marketing efforts through your loyalty program (think email open rates and click-through rates) versus marketing dollars spent on advertising to a wider audience.

Loyalty programs also offer a certain amount of “learning ROI,” providing opportunities to reward program participants for completing designated training on your product in order to better promote it through the B2B channel.

Looking for more information on ROI?

Check out these articles below, or play around with your business’ metrics and see how you can stand to benefit from a loyalty program with our ROI calculator!