Return on investment (ROI) is one way of considering profits in relation to capital invested.
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. In a survey of nearly 200 senior marketing managers, 77 percent responded that they found the “return on investment” metric very useful.
The purpose of the “return on investment” metric is to measure per-period rates of return on money invested in an economic entity. ROI and related metrics provide a snapshot of profitability adjusted for the size of the investment assets tied up in the enterprise.
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.
ROI is often compared to expected (or required) rates of return on dollars invested.
For a single-period review, divide the return (net profit) by the resources that were committed (investment):
Return on investment (%) = Net profit ($) ÷ Investment ($) x 100 %
- ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.