ROI Meaning: Return on Investment Formula
Return on Investment (ROI) measures the profit or loss from an investment expressed as a percentage. It's the most universal metric for answering one question: was this worth the money?
Unlike ROAS which only looks at ad spend vs revenue, ROI accounts for all your costs — giving you the real picture of profitability.
The ROI Formula
ROI = ((Revenue - Total Costs) ÷ Total Costs) × 100
If you invested $1,000 total (ads + product + shipping + overhead) and generated $1,500 in revenue:
- Profit: $1,500 - $1,000 = $500
- ROI: ($500 ÷ $1,000) × 100 = 50%
A 50% ROI means you earned 50 cents of profit for every dollar you put in.
Negative ROI
If your revenue is less than your total costs, your ROI is negative. Invested $1,000 and only got $800 back? That's a -20% ROI — you lost $200.
Negative ROI isn't always a disaster. New campaigns, new channels, and new markets often start with negative ROI while you're learning and optimizing. The question is whether you see a path to positive ROI with optimization.
ROI vs ROAS: The Critical Difference
This is the most common point of confusion in ad metrics, so let's make it clear:
- ROAS = Revenue ÷ Ad Spend → only considers advertising costs
- ROI = (Revenue - Total Costs) ÷ Total Costs → considers all costs
Example showing the difference
You run a Google Ads campaign:
- Ad spend: $100
- Revenue: $400 → ROAS = 4x (looks great)
- Product cost: $200
- Shipping: $50
- Total costs: $100 + $200 + $50 = $350
- Profit: $50
- ROI: ($50 ÷ $350) × 100 = 14% (much less impressive)
That 4x ROAS masked the reality. You're making money, but barely. This is why tracking ROI alongside ROAS is critical — especially for businesses with significant non-ad costs like e-commerce.
Use our ROI Calculator to compute your true ROI, or our Ads Profit Calculator for a complete profitability breakdown.
How to Calculate Advertising ROI
For ad campaigns specifically, here's a practical step-by-step:
- Add up all costs — ad spend + product costs + fulfillment + team time + tools. Don't forget overhead.
- Track revenue from those specific ads — use UTM parameters and conversion tracking.
- Subtract costs from revenue to get profit.
- Divide profit by total costs and multiply by 100.
The tricky part is attribution. If someone clicks your ad today and buys next week through an organic search, does the ad get credit? Most businesses use last-click or multi-touch attribution models to allocate revenue fairly.
ROI Benchmarks
- Break-even ROI: 0% — you got your money back but made no profit
- Acceptable: 25-50% — positive return but room to improve
- Good: 50-100% — strong performance for most paid channels
- Excellent: 100%+ — you're doubling your money or better
Context matters. A 30% ROI on a $100K investment ($30K profit) might beat a 200% ROI on a $1K investment ($2K profit) in absolute terms. Scale matters alongside percentage.
How to Improve Your Ad ROI
On the revenue side:
- Improve conversion rates to get more sales from the same spend
- Increase average order value through upsells and bundles
- Better targeting to reach people with higher purchase intent
- Test and optimize ad creative to improve CTR and lower CPC
On the cost side:
- Reduce CAC by improving funnel efficiency
- Negotiate better product/shipping costs
- Cut underperforming channels — stop spending where ROI is consistently negative
- Use automated bidding strategies that optimize for conversions, not just clicks
When to Use ROI vs Other Metrics
| Metric | Best for | Considers |
|---|---|---|
| ROI | Overall profitability | All costs |
| ROAS | Ad channel comparison | Ad spend only |
| LTV:CAC ratio | Long-term sustainability | Acquisition cost vs customer value |
| Payback period | Cash flow planning | Time to recover investment |
Use ROI when you need the real answer: are we making or losing money? Use ROAS for quick campaign-level decisions. Use LTV:CAC for strategic planning. The best businesses track all of them.
Frequently Asked Questions
ROI tells you how much money you made (or lost) relative to what you invested. A 50% ROI means you earned 50 cents of profit for every dollar invested. A negative ROI means you lost money. It's the simplest way to measure whether an investment was worth it.
ROI measures total profit after ALL costs (product, shipping, salaries, overhead). ROAS only measures revenue vs ad spend. You can have positive ROAS but negative ROI if your other costs are too high. Use ROAS for ad channel comparison, ROI for overall profitability.
A 20% ROI means you earned $0.20 in profit for every $1 invested. If you invested $1,000 in a campaign and your ROI is 20%, you made $200 in profit above your total costs. It's a modest but positive return.
Any positive ROI means you're making money. For paid ads, most businesses aim for 50-100%+ ROI after accounting for all costs. But "good" depends on your industry and alternatives — a 30% ROI might be great if your only other option earns 5%.
Social media ROI measures the total return from social media efforts relative to their total cost (ads, content creation, team time, tools). It's harder to calculate than ad ROI because organic social has indirect benefits like brand awareness that are difficult to quantify. Focus on trackable conversions first.