What is ROI and how do you calculate it?

If you have heard of ROI It's your first time at a meeting at work and you don't know what it's about, today we can solve the problem.

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In the following content, we will explain this concept in detail, as well as teach you how to do the calculations. Keep reading to check it out! 

What is ROI?

If you don't work in marketing, it's natural that the concept of ROI may still sound strange to you.

But, believe it or not, this term is much simpler than it seems, and below we will see an explanation that will help you understand it.

ROI is the acronym for Return on Investment, which is a metric used to determine whether a given return justifies or compensates for the investment made.

This return does not necessarily need to be financial, since improvements in results and performance are also evaluated through ROI.

In marketing, ROI is used to determine whether a strategy delivers good results based on the investment made.

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The idea is to help the company understand whether it is on track to achieve its goals, or whether it needs to recalculate the route to find new strategies.

++Operational Management: what it is and why it is important for your company – Valorizei.

In what areas is ROI useful?

Although ROI is a marketing resource, as it helps locate numerical data to determine whether a given strategy was positive or negative, this concept can be used in other areas.

Especially when we talk about finances or even general management, a projection about the return on a certain investment or strategy is an intelligent way of working.

This is because, think about the example of management and imagine that a manager wants to know if adopting a 4-day week brings an improvement in employee performance and for this he uses the ROI metric.

In this case, the investment would basically be giving up some of the employees' working hours, aiming to find the return which is the improvement in performance on working days and consequently in the company's profits.

With this, the manager can find data that helps him understand whether the return on investment was positive or negative: was there an improvement in performance? Does this improvement compensate for the loss in working hours? How did the company's numbers change with the new strategy?

So, from this simple example we can understand that ROI can be useful in several areas, when applied correctly.

Is it possible to calculate ROI before taking action?

As we saw previously, ROI (Return on Investment) is a very useful metric for determining whether a given action or application brings advantages or disadvantages.

In marketing, this metric is usually used post-action, that is, the company uses a strategy and then evaluates to see whether the ROI was positive or negative, that is, whether this strategy is profitable or not.

However, as we have seen, ROI is not restricted to marketing, so other areas benefit from this calculation, and even use it to determine whether a given application is worthwhile, or whether it is better to leave it aside.

So, it is clear that yes, this metric can be useful before the action, but for this it is important to already have some data for projection.

For example, in the financial market you can determine whether an application has a positive ROI based on data on the amount invested, time and yield. 

In marketing this can also work, as long as the company already has previous analyses on a certain subject, which serve as projections.

In any case, it is only possible to obtain accurate data through practice, so it is important to evaluate whether it is worth taking the risk of collecting data before each application or strategy.

How to calculate ROI?

If you thought that to calculate ROI you would have to do detailed research full of quantitative and qualitative analyses, don't worry, because that's not quite the case.

The good news is that there is a specific calculation to find the return on investment, and that is exactly what we will talk about now.

The formula for calculating ROI is as follows:

ROI = earnings – cost / cost x 100.

So, in practice it would be: if a company obtained R$ 5 thousand in profits after investing R$ 1 thousand in projects, the calculation would be as follows:

5 thousand – 1 thousand (4 thousand) / 4 thousand x 100 = 0.010%

In this case, the ROI of the operation was 400%, that is, the amount invested brought a return of 400% to the company.

Positive and negative ROI: understand the difference 

To determine whether the ROI is positive or negative, simply evaluate whether the result was a gain or a loss. 

Therefore, the greater the gain on the investment, the greater the ROI, which indicates that a certain application or action is advantageous.

On the other hand, if the gains are low or non-existent, it is a sign that the strategy did not work.

Therefore, when developing strategies, prioritize calculating the ROI correctly, in order to ensure that your strategies work correctly.

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