Return on investment

Return on investment (ROI) is the concept of an investment of some resource yielding a benefit to the investor. As a performance measure, it is used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. In purely economic terms, it is one way of considering profits in relation to capital invested.

Purpose

In business, the purpose of the "return on investment" metric is to measure, per period, rates of return on money invested in an economic entity in order to decide whether or not to undertake an investment.

ROI and related metrics provide a snapshot of profitability, adjusted for the size of the investment assets tied up in the enterprise. ROI is often compared to expected (or required) rates of return on money invested.

Marketing decisions have obvious potential connection to the numerator of ROI (profits), but these same decisions often influence assets usage and capital requirements (for example, receivables and inventories). Marketers should understand the position of their company and the returns expected.

In a survey of nearly 200 senior marketing managers, 77 percent responded that they found the "return on investment" metric very useful.

Return on investment may be calculated in terms other than financial gain. For example, social return on investment (SROI) is a principles-based method for measuring extra-financial value (i.e., environmental and social value not currently reflected in conventional financial accounts) relative to resources invested. It can be used by any entity to evaluate impact on stakeholders, identify ways to improve performance, and enhance the performance of investments.

Calculation

For a single-period review divide the return (net profit) by the resources that were committed (investment):

return on investment (%) = Net profit / Investment × 100

or

return on investment = (gain from investment - cost of investment) / cost of investment

Property purchase

Complications in calculating ROI can occur when real property is refinanced, or a second mortgage is taken out. Interest on a second, or refinanced, loan may increase, and loan fees may be charged, both of which can reduce the ROI, when the new numbers are used in the ROI equation. There may also be an increase in maintenance costs and property taxes, and an increase in utility rates if the owner of a residential rental or commercial property pays these expenses.

Complex calculations may also be required for property bought with an adjustable rate mortgage (ARM) with a variable escalating rate charged annually through the duration of the loan. (To know more about ARM, check out: Mortgages: Fixed-Rate Versus Adjustable-Rate. )

Marketing investment

Marketing not only influences net profits but also can affect investment levels too. New plants and equipment, inventories, and accounts receivable are three of the main categories of investments that can be affected by marketing decisions.

See also

• Bang for the buck
• Rate of return (RoR), also known as 'rate of profit' or sometimes just 'return', is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested
• Return on assets (RoA)
• Return on net assets (RoNA)
• Return on capital (RoC)
• Return on capital employed (ROCE)
• Return on invested capital (RoIC)
• Return on marketing investment (ROMI) is "the contribution attributable to marketing (net of marketing spending), divided by the marketing 'invested' or risked.
• Return on event (ROE) is a term used in event marketing, compared to rate of return ROR, also known as return on investment ROI, which is the ratio of money gained or lost on an investment.
• ROI for Information Technology is used to evaluate applications portfolios and information systems.
• Public ROI is used to evaluate initiatives in public sector.

RoA, RoNA, RoC, and RoIC, in particular, are similar measures with variations on how 'investment' is defined.

References

As of 1 May 2012, this article is derived in whole or in part from Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance.. The copyright holder has licensed the content utilized under CC-By-SA and GFDL. All relevant terms must be followed.