Return On Investment [ROI]

Short Definition: Profit versus time and money put forth

What is Return on Investment (ROI)?

Return on Investment, commonly referred to as ROI, is a performance measure used in the digital marketing and advertising realm to evaluate the efficiency of an investment. ROI is a fairly simple calculation—you divide the benefit/return of your invest by the cost of the investment, resulting in the ROI expressed as a percentage or ratio.

ROI = (Gain From Investment- Cost of Investment) / Cost of Investment

Gain from Investment is the proceeds you receive as a result of the investment you’re measuring. ROI is usually measured as a percentage, so it can easily be compared against ROI of other investments or ventures.

Why is ROI a useful metric?

Return on Investment is so useful because it’s simple and versatile—it immediately tells you whether an investment is profitable and how it compares to other ventures. If an investment has a negative ROI, or there are other items in a portfolio that are performing better, it may be in your best interest to halt a specific investment.

However, due to ROI’s simplicity, it also has limitations. ROI doesn’t take time into account, so while one investment may appear to be better due to a higher percentage ROI, another may be better as it gains interest more quickly over a shorter time.

ROI is an important measure in investments, as well as in digital marketing and advertising, but it has significant limitations. Use it to measure ads against each other, as well as other measures, but take into account its limits when using it to make decisions.

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