ROI (Return on Investment) tells you whether spending money made you more money. But most ROI calculations are oversimplified or just wrong.
The Basic Formula
ROI % = (Net Return - Investment Cost) ÷ Investment Cost × 100
Example:
- Investment: £10,000
- Return: £15,000
- Net gain: £5,000
- ROI: (£5,000 ÷ £10,000) × 100 = 50% ROI
Simple enough. But this ignores time.
Time Matters: Annualized ROI
50% ROI over 1 year? Great.
50% ROI over 10 years? Terrible.
Annualized ROI formula:
ROI per year = [(1 + Total ROI) ^ (1 / years)] - 1
Example:
- Total ROI: 50%
- Time: 3 years
- Annualized ROI: [(1.5) ^ (1/3)] - 1 = 14.5% per year
This lets you compare investments with different time periods.
What Counts as "Investment Cost"?
Don't forget:
- Setup costs
- Training time
- Opportunity cost
- Maintenance costs
- Your time (if not paid)
Example: Buying Equipment
Simple view:
- Equipment: £5,000
- Revenue increase: £8,000/year
- ROI: 60%
Complete view:
- Equipment: £5,000
- Installation: £500
- Training (20 hours @ £30/hr): £600
- Annual maintenance: £400/year
- Total first-year cost: £6,500
- ROI: (£8,000 - £6,500) ÷ £6,500 = 23%
What Counts as "Return"?
Net return = Revenue generated - costs to generate that revenue
Example: Marketing Campaign
Wrong:
- Spent: £2,000 on ads
- Sales from ads: £10,000
- ROI: 400%
Right:
- Spent: £2,000 on ads
- Sales from ads: £10,000
- Cost of goods sold: £6,000
- Net return: £10,000 - £6,000 = £4,000
- ROI: (£4,000 - £2,000) ÷ £2,000 = 100%
You must subtract the cost of delivering those sales.
ROI vs Payback Period
ROI: Percentage return
Payback period: Time to recover investment
Example:
- Investment: £12,000
- Return: £2,000/year
- ROI (3 years): 50%
- Payback: 6 years
High ROI doesn't mean quick payback. Both matter.
What's a "Good" ROI?
Context matters:
Marketing: 200-500% is typical (£2-£5 returned per £1 spent)
Equipment: 20-40% annually
Training: 50-200% (hard to measure)
Property: 8-15% annually
Business acquisition: 30-50%+ over 3-5 years
Compare to your hurdle rate: the minimum ROI you require.
If you can earn 10% safely elsewhere, any investment returning <10% isn't worth the risk.
Common ROI Mistakes
Mistake 1: Ignoring time value of money
£100 today is worth more than £100 in 3 years (inflation, opportunity cost).
Mistake 2: Cherry-picking the timeframe
Measuring ROI at the peak performance month, not average.
Mistake 3: Survivor bias
Only calculating ROI on investments that worked, ignoring failures.
Mistake 4: Not including all costs
"This free trial has infinite ROI!" No, your time costs money.
Mistake 5: Assuming linearity
"This campaign gave 400% ROI, so let's spend 10x more!" Diminishing returns exist.
ROI for Different Business Decisions
Hiring an Employee
Investment:
- Recruitment: £3,000
- Training: £2,000
- First-year salary + NI + pension: £43,000
- Equipment: £2,000
- Total: £50,000
Return:
- Additional projects won: £80,000
- Cost to deliver: £20,000
- Net: £60,000
ROI: (£60,000 - £50,000) ÷ £50,000 = 20% first year
Buying Software
Investment:
- Software: £500/year
- Setup time (10 hours @ £40/hr): £400
- Total: £900
Return:
- Time saved: 2 hours/week × 48 weeks = 96 hours
- Value: 96 × £40 = £3,840
ROI: (£3,840 - £900) ÷ £900 = 327%
Website Redesign
Investment: £8,000
Return (annual):
- Extra sales: £25,000
- Cost of those sales: £15,000
- Net: £10,000/year
Year 1 ROI: (£10,000 - £8,000) ÷ £8,000 = 25%
Year 2 ROI: (£10,000) ÷ £0 investment = infinite (but not really)
Better to look at 3-year total: £30k return on £8k investment = 275% over 3 years = 55% annualized
When ROI Isn't Enough
Some investments can't be measured purely in ROI:
- Brand building
- Employee morale
- Customer satisfaction
- Risk reduction
Don't skip these just because ROI is hard to quantify.
Use our ROI Calculator to model your investments properly.