What is the ROI formula and how do you calculate it?
ROI = ((Net Return − Cost of Investment) ÷ Cost of Investment) × 100%. Net Return = Final Value − Initial Investment. Example: invest $5,000, get back $7,500: ROI = ((7,500 − 5,000) ÷ 5,000) × 100 = 50%. ROI can also be expressed as a ratio: 1.5x. A negative ROI means you lost money. The formula is the same whether evaluating stocks, business projects, marketing campaigns, or real estate.
What is a good ROI percentage?
Context determines what "good" means. Stock market: 7–10% annual ROI is the long-term average for broad index funds. Real estate: 8–12% is typical; cash-on-cash returns of 6–10% are considered solid. Marketing campaigns: digital marketing often targets 4:1 ROI (300%) or higher. Business projects: most companies use a hurdle rate (minimum acceptable ROI) of 10–15%. A positive ROI is good; a higher ROI is better — but always compare to the risk taken.
What is the difference between ROI and annualised ROI?
Simple ROI measures total return regardless of time horizon. Annualised ROI (CAGR — Compound Annual Growth Rate) standardises return to a yearly rate, making investments of different durations comparable. Formula: Annualised ROI = ((Ending Value ÷ Beginning Value)^(1 ÷ Years)) − 1. Example: a 50% ROI over 4 years = (1.5^(1/4)) − 1 = 10.67% per year. Always use annualised ROI when comparing investments held for different lengths of time.
What are the limitations of ROI as a business metric?
ROI has several blind spots: it ignores the time value of money (a 50% ROI over 10 years is very different from 50% in 1 year); it does not account for risk or volatility; it treats all costs and returns as cash, missing intangible benefits (brand value, employee satisfaction); and it can be manipulated by excluding certain costs. For capital allocation decisions, businesses prefer NPV (Net Present Value) or IRR (Internal Rate of Return), which account for time value and project duration.
How is ROI calculated for marketing campaigns?
Marketing ROI = ((Revenue Attributable to Campaign − Campaign Cost) ÷ Campaign Cost) × 100%. A 4:1 ratio ($4 revenue per $1 spent = 300% ROI) is a common industry benchmark for digital marketing. Calculating correctly requires proper attribution — determining which sales were actually driven by the campaign. Tools like Google Analytics, UTM parameters, and CRM tracking help isolate campaign-generated revenue from organic sales.