ROI is an abbreviation of the term return on investment. It is a financial metric which most companies use to track their profitability.
ROI does not play a big role when it comes to one-time purchases or sales, but for more complex online store matters, the ROI will provide you with an overview of how well you are utilising the invested money. The optimal return value should be in multiples of the invested amount.
The ROI calculation is most often used when evaluating the potential of an investment or when comparing the return of two different investments.
Formula for calculating ROI
The preposition ‘on’ indicates that it is a share between revenues and costs.
The formula for calculating ROI looks like this:
ROI = (return on investment – cost of investment)/cost of investment
The result is in multiples, but if you multiply it by 100, you will get the result in percentages. Costs represent everything a business needs to generate profit. This includes costs for marketing, labour, storage, and so on.
Application of the ROI (Return on Investments) metric
For example, if you invest €10,000 and make a net profit of €25,000, your resulting return on investment will be €25,000 – €10,000 / €10,000 = 1.5. This means that you have increased the value of your investment 1.5 times or, if expressed as a percentage, the investment yielded a 150% profit.
When managing a company, you should gain an understanding of all the numbers and metrics involved. Check out other articles on how to calculate the profitability of an online store.
