ROI (Return On Investment) – an indicator of the profitability or unprofitability of a business, based on investments made in it (in other words, an indicator of return on investment).
The ROI indicator is calculated separately for each investment, while calculations can be made for different time periods or individual events. To get the result, you need to know the costs and the resulting income. ROI is actively used not only to determine the return on investment, but also to build a future strategy.
The simplest formula for calculating ROI is as follows:
For example, if your income was $5,000 and your expenses were $2,000:
That is, each invested dollar brought in the end a dollar and a half. The higher the indicator, the better (it must be more than 100%, otherwise there is no profit). Small as well as negative indicators indicate low profitability or even unprofitability of the business.
The disadvantages of ROI include the impossibility of taking into account many factors, it is too general. In addition, this indicator is not able to indicate the overall usefulness of the ongoing marketing campaign. So, even if the investment turned out to be profitable, it is impossible to find out how it affected customer relationships. For this reason, ROI is commonly used to determine the profitability of a one-time investment.
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