Financial Glossary
Return on investment
Return on Investment is a ratio that measures the gain or loss generated by an investment relative to its cost: ROI = (Net Profit divided by Investment Cost) multiplied by 100. It is expressed as a percentage and can be calculated for any discrete investment -- a marketing campaign, a piece of equipment, a business acquisition, or a software subscription. ROI does not account for the time value of money or investment duration, which is why longer-horizon decisions typically use internal rate of return or net present value alongside ROI to capture timing effects.
Problem & Application
A campground spends $18,000 on a new online booking engine and digital marketing package. In the 12 months following the launch, direct online bookings increase by $54,000 in incremental net revenue that can be attributable to the channel (controlling for seasonal variation). ROI = ($54,000 minus $18,000) divided by $18,000 = 200%. However, if the booking engine also required $6,000 in staff training and integration work, the true investment is $24,000 and ROI falls to 125%. Accurately capturing all-in costs is the most common ROI calculation error: operators count only the vendor invoice and omit internal time, training, and integration costs, inflating ROI and making subsequent budgeting decisions on flawed assumptions.
In Short
ROI is essential for evaluating the financial success of investments and ensuring that resources are used efficiently to generate returns.