ROI is a functional metric in areas such as marketing and sales that helps you know how much money you are spending.
Once you make the decision to invest in stocks or your business, you must be clear about whether you are making profits and losses. But how to know? This will be the topic we will discuss today.
What is the formula to get the ROI?
For us, the ROI formula is like Formula 1, the world motorsport championship that bears this name, since it refers to a set of norms and rules that participants must comply with and the term “formula” refers to those instructions, The same thing happens with ROI, it is number one in investment metrics.
Well, as we explained in a previous installment, ROI (Return on Investment) is an indicator that determines the profits obtained under a specific action.
So performing this measurement offers us the ability to analyze the performance of the proposed strategies.
Now, the formula or rule to obtain the ROI is always expressed in percentage and is calculated as follows:
ROI = (Income – Investment) / Investment x 100
This rule consists of subtracting the profits obtained (income) from the investment, the result of this operation is divided and then multiplied by 100 to know the percentage of return, it is a rule of three.
To convince you of the importance of calculating ROI in your business, we will give you a checklist of the benefits that will give you when using it.
✅ We can find out if you are earning more money than you initially invested or not.
✅ Learning to calculate ROI allows you to know which channel to invest in, whether in social networks or email marketing, and to know when.
✅ Calculating ROI helps make important decisions such as implementing tools, expanding or reducing the work team.
✅ You will be able to optimize your budget to know which are the most profitable investments and distribute the money intelligently.
✅ Reevaluate your investment strategy in case any of your investments are not giving the expected results.
ROI calculation: how to do it…
Although calculating ROI requires a simple formula, it also requires some simple steps to do it, these are three of them:
Well, before starting you should know what you are going to measure and what KPIs you can use.
Step one – Identify the profit generated: this can include sales income, cost savings, interest, among others.
Step Two – Subtract Associated Costs: Derive all expenses related to the investment.
Step three – Apply the formula: once you have the precise profit and the cost of the investment, you can calculate the ROI with the formula we mentioned before, knowing the exact percentage.
How to achieve an effective interpretation of the results?
After knowing the exact ROI formula, it is also a priority to achieve an effective interpretation of the highlights. How? Very easy
- Compare the ROI obtained with market standards or by reviewing the average investment performance, this will help understand if the ROI result is higher, lower or maintains the expectations of the sector.
- Consider risk factors, because if you obtain a very high ROI result it could be associated with risk, so analyze the relationship between the risk assumed and the return obtained.
- Be aware of hidden costs; Including all costs associated with the investment will help you get an accurate picture of ROI.
- Combine ROI with other metrics to make informed decisions about future investments or the continuation of current ones.
- Effectively interpreting ROI consists of going beyond the formula or numbers, as it requires examining many contextual factors, time, risk and future projections.
