ROI: what it is and how to calculate return on investment
From budget allocation to choosing which initiatives to pursue, from launching new products to expanding into new markets, not to mention evaluating a new marketing campaign or SEO spend. ROI is the common thread that ensures consistency and direction to every company’s strategies because it gives us a clear view of the economic impact of our decisions. In a world where every penny counts, having a solid understanding of what ROI is and how to calculate it effectively means being in control of the business rudder and sailing into more profitable waters.
What is ROI, Return On Investment
ROI stands for Return On Investment, which can be translated into Italian as “return on investment.”
ROI is a financial indicator that measures the effectiveness of an investment because it indicates the ratio of the gain achieved to the expenditure served for the purpose. That is, it tells us in absolute terms how much value was generated for a certain amount of resources expended.
In essence, ROI is a key metric for evaluating the effectiveness of an expenditure or investment made, because it is used to understand whether or not an investment has produced a return relative to the expenditure incurred to make it.
In simple terms, ROI measures the efficiency of an investment by comparing the return achieved with the capital employed. It is a concept that resonates through boardrooms and offices around the world because it offers a clear, quantifiable answer to the fundamental question, “How much am I making from this investment?”
Meaning of ROI and return on investment
When we talk about ROI, we get to the heart of business strategy, since it is this indicator that drives investment decisions, large and small, and provides a clear indication of whether an action taken is leading to the desired growth.
In an environment where resources are limited and every choice can affect a company’s future, awareness of the true meaning of ROI becomes crucial.
Return On Investment is the criterion by which we assess whether the use of company resources is generating value. More: this concept extends beyond the simple calculation of financial gain and becomes a strategic assessment tool for understanding the success or failure of a project, online and otherwise.
From a practical point of view, as we will see later in detail, ROI is calculated by dividing the net gain obtained from the investment by the expenditure incurred, with a value expressed as a percentage that represents, therefore, the real profit derived from that activity.
Calculating ROI is essential for assessing the profitability of business projects and activities, enabling informed decisions to be made and resources to be allocated more effectively and efficiently. It is not merely an accounting exercise, but a dynamic principle that guides investments, whether in the tangible or digital world. This metric is widely used to evaluate the performance of different types of investments, such as stocks, bonds, real estate or business projects, and can also be used to compare the effectiveness of different investments with each other and choose the most cost-effective one.
Because it is easy to read, in fact, one type of ROI can be quickly compared with the returns of other interventions, so that a variety of investment types can be measured and evaluated to determine the most profitable one.
When we talk about ROI, in fact, we are referring to a simple percentage that tells us how much money was gained or lost relative to the amount initially invested. It is a concept that is immediately understandable in its essence, but the implications it carries are far-reaching and crucial to the success of any business.
What ROI is good for (and what the limitations are)
Given its peculiarities, ROI is a useful tool for assessing the profitability of a project or advertising campaign, but also for making informed and rational decisions in the business environment based on hard data, and it can serve in a variety of contexts, from the business world to the realm of personal investment.
Basically, it is calculated by dividing the profit generated by the investment (e.g., sales) by the cost of the investment: if the value is positive, the investment has generated a gain greater than the expense incurred, while if it is negative, it means that the investment has resulted in a loss.
But what is ROI used for? First and foremost, it allows us to monitor the company’s performance and identify any areas for improvement; it also allows us to evaluate the appropriateness of one investment over another and to choose the best strategy based on the expected results.
For example, if we want to launch a new line of products or services, we can evaluate the ROI of the different options available and choose the one that provides the best return on investment, or use the indicator as a parameter for remunerating employees or negotiating with suppliers.
However, ROI should always be considered in relation to other financial indicators and should not be the sole criterion for evaluating investments, partly because there are some limitations in its use that are important to consider.
First, ROI does not take into account all the costs of the investment, but only those directly related to the activity in question: this means that indirect costs, such as those related to human resource management or facility maintenance, are not considered.
In addition, ROI does not consider the time it takes to achieve the return on investment: for example, if an investment takes many years to generate a significant return, the ROI may appear low even if the investment will prove profitable in the long run.
Third, ROI can be affected by external factors unrelated to the investment itself, such as market fluctuations or regulatory changes: in these cases, ROI could provide a biased assessment of the effectiveness of the investment.
Finally, it is important to note that ROI does not take into account the long-term implications of the investment on the company’s reputation or customer satisfaction, intangible factors that may be difficult to quantify but are relevant to assessing the overall impact of the activity on the organization.
This is another reason, then, why using ROI is certainly useful for assessing the effectiveness of investments, but even more appropriate is to integrate it with other metrics and other qualitative factors to achieve a more complete and accurate assessment.
How ROI is calculated
To calculate ROI, the formula that is used is as straightforward as it is powerful, because it compares the gain obtained from the investment with the cost of the investment.
This calculation gives us a percentage value that can be immediately interpreted and applied to a wide range of business activities, from a marketing campaign to an investment in new technology. A positive ROI indicates a gain, while a negative ROI signals a loss.
But let’s not stop there: the real value of ROI lies in its ability to influence future decisions. If a company records a negative ROI on a particular marketing channel, it knows it is time to revise strategy or redirect funds.
For this reason, calculating ROI requires accurately identifying all the costs associated with the investment and the gains from it. It is then important to include in the calculation not only direct costs, but also indirect costs, such as staff time or resources used: only then can we get an accurate measurement and maximize strategies.
The ROI formula
Let us then come to the “numbers.” The formula for calculating ROI is as follows:
ROI = (Total Gain – Investment) / Investment x 100
sometimes also expressed as:
Net Gain / Investment x 100
Net Gain, in fact, represents the total amount of profit generated by the investment, net of the expenses incurred in making it (and thus is exactly the value of the difference between Total Gain and Investment, expressed in the first formulation). The cost of the Investment includes all expenses incurred to purchase, produce, or implement the investment.
Ultimately, then, the ROI formula is quite simple: we divide the net gain from the investment by the cost of the investment, and the end result is expressed as a percentage.
For example, if we invest 10,000 euros in a project and get a gain of 12,000 euros, the ROI calculation will be as follows:
ROI = (12,000 euros – 10,000 euros) / 10,000 euros x 100 = 20%.
And thus, the investment generated a gain of 20% over the amount invested.
Calculating return on investment: the formula, examples and process
In short, calculating ROI is surprisingly straightforward, but its application can be complex depending on the context and specific goals.
The formula gives us a percentage value that represents the return on investment, but, as mentioned, it is critical to consider all the costs associated with the investment and correctly identify the gains from it.
For example, when calculating the ROI of a digital marketing campaign we should include not only the cost of advertisements, but also the time spent by staff, the cost of the marketing platforms used, and any other indirect costs. Similarly, earnings should reflect not only immediate sales, but also the long-term value of acquired customers.
Turning to clarifying examples, think of a company that spends 20,000 euros on a marketing campaign and generates additional sales of 50,000 euros. The gain from the investment is the difference between the additional sales and the cost of the campaign, so 50,000 euros – 20,000 euros = 30,000 euros. This is the net gain from the investment.
Or, remembering to include in the calculation not only direct costs, but also indirect costs, such as staff time or resources used: a company invests in new software that costs 5,000 euros and expects this to lead to savings in staff time, estimated at 7,000 euros per year. In addition, due to the improved efficiency, sales are expected to increase by 3,000 euros per year. The total expected gain is thus 10,000 euros per year.
ROI for the first year would be calculated as:
ROI = ((10,000 / 5,000) x 100) = 200%.
This example shows a very positive ROI, indicating that the investment in the software was very beneficial to the company.
Expected ROI: meaning and explanation
Return on investment is not just a number to be achieved; it is a compass that guides companies through market storms. This also works on a forecasting basis: calculating expected ROI means not just relying on optimistic estimates, but setting concrete targets based on historical data, market trends, and competitive analysis.
“Expected ROI” is in fact a forward-looking estimate of the return a company expects to get from a specific investment. This forecast is based on historical data, market analysis and future projections, in a process that requires considering variables such as consumer behavior, economic conditions and competition.
Expected ROI is critical in the planning and budgeting phase, as it helps determine whether a project or campaign is worth pursuing based on the potential payoff.
Forecasting expected ROI is especially important when launching new products or entering new markets. In these cases, expected ROI can help determine the level of resources to allocate and can act as a guardrail to keep investments aligned with business objectives. It is a tool to navigate confidently into the future, providing a solid foundation for strategic and financial planning.
To give an example: a company investing in a new online advertising campaign can predict an expected ROI based on the performance of similar campaigns in the past. If it previously invested 10,000 euros and generated sales of 15,000 euros, it might expect a similar or better ROI, depending on variables such as improved advertising strategy or expanded target market.
Negative ROI: what it means and what to do
But what happens when the ROI is not as hoped and indeed we find that we are at a loss?
Let us imagine that a company has invested 50,000 euros in a marketing campaign to launch a new product. However, due to poor market response or an ineffective campaign, the sales generated were only 30,000 euros. The net gain from the investment would then be -20,000 euros (30,000 euros in sales minus 50,000 euros in cost), resulting in a negative ROI.
A negative ROI occurs when the cost of an investment exceeds the gains from it. This result indicates that the investment has actually lost money rather than generated money. Obviously, this case is a red flag for companies because it suggests that resources may have been allocated inefficiently or that the investment strategy did not work as planned. It is not just a financial loss, as it can also have broader implications for the company, such as damaging brand reputation or reducing investor confidence.
However, when faced with a negative ROI, it is essential not to panic, but to proceed with a thorough analysis. Identifying the causes of an unsatisfactory ROI is the first step in implementing corrective actions, starting with a critical and objective disanimate of advertising campaigns, sales data, and the effectiveness of marketing initiatives. This might mean reallocating the budget to better performing channels, reviewing the target audience, improving the quality of the product or service offered, or on the more practical side reviewing the keyword strategy or improving the user experience of the website. In some cases, more radical change may be needed, such as a website redesign or a restructuring of the product offering.
For example, if a company finds that its marketing campaign did not yield because of advertising messages that did not resonate with the target audience, it may need to revise the message or targeting strategy, better identifying buyer personas. Similarly, if a new product is not selling because it is not meeting market needs, the product development process may need to be revised or more in-depth market research conducted.
Possible reasons for a negative ROI may include high cost of investment, lack of sufficient demand for the product or service offered, organizational or management problems, or too much competition.
Solving the negative ROI situation may require reducing investment costs, increasing marketing and sales efforts to increase demand for the product or service, restructuring the organization, or improving business management. In some cases, it may be necessary to abandon the investment altogether and look for other more promising opportunities.
What is important is that any changes are driven by data and analysis, with the goal of turning that negative ROI into a success story.
What are profitability indicators?
To summarize, then, ROI is a very useful metric but one that must be interpreted in conjunction with other metrics to get as complete and effective a picture as possible. We can, for example, add the other profitability indicators to the analysis, which are precisely measures used to assess a company’s ability to generate profits relative to costs incurred.
These indicators are used to assess the company’s performance and can also be used as an analytical tool for making decisions about business management, and in general to monitor the financial health of the company.
ROI is indeed one of the main indicators of profitability, but also useful are ROE, or Return On Equity, which measures shareholder profitability by calculating the ratio of the company’s net profit to shareholders’ equity (capital)-in short, a high ROE indicates that the company is generating substantial profits relative to the capital invested by shareholders.
Then there is profit margin, which measures the percentage of net profit on each euro of sales: again, intuitively, a high profit margin indicates that the company is generating consistent profits relative to sales.
Finally, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is used to assess the company’s operating profitability: this indicator calculates the company’s profits before interest, taxes and expenses related to depreciation of assets and amortization of fixed assets.
In any case, it is important to emphasize that profitability indicators should not be considered in isolation, but should be evaluated in an integrated way with other factors such as the market situation, competition, and company policies, always with the aim of having a more complete and accurate view of the company’s performance.
ROI in digital marketing: importance and practical uses
Coming to issues closer to our sphere of action, Return on Investment can be a useful indicator for assessing the effectiveness of a company’s marketing activities, going to measure the ratio between the profit obtained and the expenditure incurred on a specific advertising campaign or promotional action.
In digital marketing, and particularly in SEO, the concept of ROI takes on a critical dimension and an even more multifaceted connotation.
The importance of ROI lies in the fact that it allows us to objectively assess whether marketing strategies are actually generating profits: thanks to the data obtained, in fact, we immediately understand which campaigns are producing a greater return and which should be optimized or abandoned, so as to make informed decisions about the allocation of financial resources in the future. If a campaign has produced a positive ROI, in fact, we can think about investing more in that direction to maximize profits, while when a campaign produces a negative ROI it gives us an indication of the opposite sign, inviting us to think about whether we should reduce investments in that strategy and focus on other solutions.
In addition, calculating ROI is also particularly useful for demonstrating the effectiveness of marketing activities to other stakeholders in the company, such as executives or investors, or to clients who have entrusted us with work, because it gives us a way to demonstrate with concrete numbers the impact of the implemented interventions on the company’s economic performance.
More precisely, ROI in digital marketing is calculated based on the results obtained from online advertising campaigns, such as the number of clicks on advertisements or the conversion rate of landing pages, always comparing the results with the expenditures made on online advertising.
Assessing the success of business initiatives through return on investment requires looking beyond the immediate numbers and considering the long-term impact of the actions taken. An investment may have a low immediate ROI but generate significant benefits over time, as in the case of branding campaigns or investments in research and development.
Even more specifically, for digital companies, return on investment is often linked to the ability to adapt quickly to changes in technology and consumer preferences. In this context, ROI can be influenced by factors such as the effectiveness of a digital marketing campaign, the quality of the user experience offered by a website or app, or the efficiency of an e-commerce system. The ability to measure and interpret ROI in these scenarios is critical to maintaining a competitive advantage and ensuring that resources are optimally allocated.
What is ROI in SEO and how to calculate the ROI of SEO
The above also applies in the more specific of SEO, where ROI is used to measure the return on investment of all activities related to optimizing organic visibility. That is, in simpler terms, it indicates the relationship between how much we spend on SEO and the results we actually get.
It is no secret that ranking at the top of search results can be a powerful driver of traffic and conversions, but it is equally true that achieving those positions requires time and investment in quality content, on-site optimization, and building a solid backlink profile. Measuring ROI in SEO allows us to understand whether the time and resources spent are actually bearing the desired fruit.
Identifying the ROI of online strategies can indeed be complex, in part because the timing of SEO is not fast and it brings significant results only with the right patience and ability to wait, but nonetheless there are a number of KPIs that we can keep track of to understand what direction our work is taking with respect to business goals.
Specifically, ROI in SEO can be measured by analyzing the results obtained from website optimization activities, such as increased organic traffic, decreased bounce rate, or increased conversions.
The value of ROI in SEO
We know how much SEO matters, but also how difficult the activity of site optimization can be, which is dispersed in so many technical, content, but also “relational” aspects: even after the planning and resource identification phases, the application of the strategy may then not immediately translate into organic revenue, and this may make it complex to justify the cost of the activity (and justify its usefulness) without knowing its actual ROI, which precisely allows us to determine the true value of initiatives to improve the organic visibility of the brand.
The ROI of SEO-by definition, the value of the return on investment of SEO efforts-can become an important ally of ours, because it helps us put the financial value of digital marketing efforts into perspective, but its calculation is not as straightforward as that of the previous, more quantifiable examples.
For example, if we want to measure the return on investment for Pay-Per-Click (PPC) advertising we can simply refer to the exact investment figures in a given period, because by its peculiarity with PPC we pay a defined amount for each click on ads. Basically, the PPC cost includes the amount we are charged per click plus the cost associated with the internal team that manages the PPC campaigns (or agency fees, if we have outsourced the management of the SEA), and therefore the ROI of a PPC campaign is quickly calculated by dividing the profit by the figures of this investment.
Calculating ROI for SEO is a bit more challenging, because there is no fixed cost per organic click and it is not possible to directly measure the impact SEO efforts have on organic revenue generated from search traffic. Generally speaking, the site has a positive ROI if the organic revenue generated by SEO campaigns is greater than their cost, with the understanding that SEO is a long-term strategic activity and not a quick fix tactic.
We can more profitably calculate the expected ROI, a forecast estimate of the profit an SEO campaign might generate based on estimated costs, revenue and other assumptions, and compare it to the actual ROI, which is the true return on investment derived from that campaign.
How to calculate SEO ROI: formulas and information
Conceptually, calculating the ROI of SEO is very similar to calculating the ROI of any other type of business investment. We always need two figures: how much we invest (cost) and how much we get back (profit).
Measuring SEO ROI is a process that goes beyond simply counting clicks or impressions-it requires in-depth analysis of user behavior, conversion rate, and customer lifecycle value. This type of analysis can reveal the effectiveness of target keywords, content quality, and website usability, all of which influence search engine rankings and, consequently, ROI.
In our industry, “SEO cost” represents the amount of money spent on SEO campaigns, calculated by considering various factors: for example, whether we manage SEO in-house or work with an agency, whether there are costs related to the use of specific technologies or tools to support the SEO strategy, any product expenses, and so on. Specifically, the cost of in-house resources is easy to measure if the professional or team works full-time on SEO only; however, if they also engage in other activities, we should assess as an expense only the time actually spent on SEO (based on an estimated hourly rate).
It is important to understand that conversion tracking (and ultimately ROI) will look different whether we operate an e-commerce site (sell a product) or a lead-based business (provide a service): e-commerce sites have data from their online transactions that show exactly how much they earn from web sales, while lead-based businesses must assign a monetary value to their types of conversions. Although it is easier and more accurate to track conversions for e-commerce, it is certainly possible for lead-based companies.
Intuitively, in the latter case, SEO gain is not only the monetary amount that comes back from campaigns, but also the value gained by measuring the organic performance of the website. In this sense, it becomes vital to identify key performance indicators (KPIs), and in particular to keep an eye on the following metrics to verify that our efforts are paying off:
- Ranking. It may be trite to say, but monitoring the ranking of major keywords over time directly reflects the success of an SEO strategy.
- Organic traffic. This KPI tracks how many visitors arrive at the Web site (home page) and key pages from organic search results.
- Bounce rate. The bounce rate estimates the percentage of users who enter the Web site and leave without performing any action, thus indicating the absence of any interaction between visitor and content. However, it is not enough to dwell on the numerical figure alone: high bounce rates can have several reasons and sometimes result from technical SEO problems, but if, for example, a specific page fulfills its intent (users find the information they need and leave again), the “bounce” is not due to poor website performance but is “natural,” so to speak.
- Organic CTR (click-through rate). CTR measures the ratio of users who clicked on the site because it appeared in Google search results to the total number of users who viewed the search results. A high CTR indicates that we have chosen the right audience as our target audience and have a site and content that is attractive enough for a high percentage of users to click on the link.
- Soft and hard conversions. Hard conversions can be contact form submissions, phone calls, demo recordings, and so on, and are generally considered the traditional types of conversions because they show clear intent. Soft conversions indicate clear interest: newsletter sign-ups, content downloads, shares and likes on social, for example. Usually, it is more natural to tend to focus on hard conversions, but it would be wise to keep the two in balance by fully engaging visitors in our marketing ecosystem through follow-ups.
- Site speed. In addition to being a ranking factor, improving loading speed helps improve the user experience and reduce user frustrations related to wait times.
- Pages per session. Represents the average number of pages viewed by visitors during a session.In contrast to bounce rate, a high number of pages per session means that users are interacting with website content.
- Organic impressions. The count of how many times the website was viewed for all search queries performed, which can help measure better brand awareness for key search terms.
