Return on Investment (ROI)

Return on Investment (ROI) or Return on Marketing Investment (ROMI) equals the gain from a program minus the cost of the program, divided by the cost of the program.

ROI = (gain – cost) / cost

For example: Let’s assume that you started a new (incremental) advertising program, that it cost $50,000 in its first year, that it promoted $600,000 in incremental sales during the same year, and that the gross profit from these sales was $200,000.

If you subtract your incremental advertising dollars ($50,000) from the incremental gross profit generated ($200,000), you see that you have generated $150,000 of net operating profit.

Stated differently: the effect of your advertising added $200,000 to operating profit, and the cost of your advertising subtracted $50,000 from operating profit, for a net increase of $150,000.

Your ROI is

 

($200,000 – $50,000) / $50,000 = 3 = 300 percent

In other words, on average, each dollar you spent on the new (incremental) program brought in three dollars of profit.

Usually ROI is expressed as a percentage.

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