What is ROI, Formulas, and Examples in Marketing?

For a business actor, one of the goals a company always wants to aim for is profit from investment, maybe you who are currently a finance, marketing, or business actor even though you are already familiar with the term ROI or the abbreviation of return on investment.

ROI is an important thing that must be understood by business actors because ROI will later become a benchmark or assessment of a company's profits.

In this article DailySocial will explain what ROI is and an example of how to calculate it.

Come on, see the following explanation!

What is ROI?

Return on investment or ROI is the act of generating a profit and loss ratio of investments resulting from digital marketing. Or it could be a ratio used to evaluate the efficiency of investments made by the company.

So in general ROI is the profit obtained from the total investment assets of the company.

So that the calculation of ROI will help to re-analyze the investment plan of an asset. 

The calculation of ROI is also usually needed by investors who will invest in a company, later ROI will be used as reference material as well as evaluation to make the right investment decisions.

ROI will also produce two possibilities, namely positive and negative values, if the ROI gets a positive value then the investment can be carried out, but if the ROI shows a negative number then the investment must be immediately revoked.

As explained earlier, ROI can also be generated from digital marketing or a product campaign.

Understanding ROI according to experts

After knowing the definition of ROI or return on investment In theory, you can also find out the definition of ROI from economists as follows:

Cashmere (2015) 

The ROI formula is used as the ratio of returns or returns on assets used by a party in the company. Meanwhile, ROI is a scale measuring the effectiveness of the management of an investment transaction.

Shamsudin (2011) 

ROI or Return on Investment is a scale of comparison between net income after tax with total assets.

Rahardjo (2009) 

ROI is a ratio used to measure the company's ability to generate profits in the investments they make.

The formula for calculating ROI

ROI is the result of profits or profits generated from a company's investment, so it can also be referred to as the ratio of net income to costs. The ROI formula is as follows.

ROI = (Investment Income - Investment Cost) / Investment Cost x 100%

Example of ROI calculation:

If you make an investment of IDR 15 million and generate sales of IDR 20 million, it means that the profit earned is IDR 5 million.

So to calculate ROI or return on investmentis to use the formula above:

ROI = (Rp 20 million - Rp 15 million) / Rp 15 million x 100%

ROI = 33,3%

So that return on investment what you will get is 33,3%

Factors affecting ROI

The high or low ROI resulting from an investment is certainly caused by several factors, including:

1. Profit Margins

That is an operating profit expressed as a percent and the amount of net sales. This profit margin will later measure the level of company profits that will be associated with sales.

2. Turnover

Turnover Usually it will come from operational assets or also the asset turnover rate used for operational costs, namely the speed at which an operational asset rotates within a certain period.

With ROI, business actors can also see how efficient a company is in utilizing assets for operational activities and can also be used to measure the company's profitability.

Benefits of ROI analysis

Of course, apart from being an evaluation and reference material in investment, ROI analysis also has several benefits for the company, namely:

1. ROI analysis can be used to compare the use of capital in similar companies.
2. ROI analysis is also used to measure the cost and capital allocation of each division.
3. Used to measure the profitability of the company's products.
4. ROI analysis can be used as reference material for making decisions if the company expands.
5. ROI is used for financial planning and company management.

Return on Investment in marketing

Not only in the financial world, the term ROI is also often used in marketing or marketing marketing. ROI marketing is tthe act of generating a profit and loss ratio of investments resulting from digital marketing.

An example of ROI in marketing can be seen from the use of marketing strategies, because digital marketing can also be used as a form of company investment. There are some types of digital marketing which can be used as an investment and generate ROI in between marketing campaigns, social media marketing, and email marketing.

In fact, the use of email marketing as a company's marketing strategy can more profitable than social media marketing.

Direct Marketing Association (DMA) mention if ROI email marketing produce return $40 for every $1 spent. Even, marketing channel others can't touch the numbers return this.

If you are asked what percentage is a good ROI, then the answer is the use of email marketing can increase ROI or return on investment up to 3800% if the segmentation and personalization are carried out optimally and precisely.

Disclosure: This article is in collaboration with MTARGET.