Synonyms: return on assets, rate of return, payback
From a definition standpoint, ROI is short for Return on Investment, and is a measure of performance that is used to evaluate the efficiency of an investment. ROI tries to directly measure the amount of return on a particular investment relative to the cost. This can be applied to actual purchases such as software or tooling, or to more tactical items like marketing campaigns.
Why do we care about ROI?
When someone is writing you checks or funding your department’s efforts, it is important to be able to show what you are putting that money towards and how those efforts are supporting the business. In addition, ROI Is an extremely helpful metric that can help take the guess work out of making future business decisions or justifying future investments in things such as marketing efforts, technologies, staffing, etc.
How do we calculate ROI?
From a purely mathematical standpoint, the ROI formula is as follows
ROI = (Current Value of Investment – Cost of Investment) / Cost of Investment.
Now, calculating ROI isn’t always that straight forward. Take things like personalization or workshops that deliver marketing strategies – those are a bit more fuzzy to calculate ROI on and require a bit more thought.
Stay thirsty, friends!