A Business Amateur Vocabulary Lesson, Part 3: What is Return on Investment (ROI)?

The term “ROI” is another one of those business terms that I hear people talking about, and finally found out what they meant.  I should preface this by saying that I may be oversimplifying a very complex business principle here, but I’m just going to give my understanding of it.  Whenever a business is going to start up, or even just add something new when they are already established, they are going to have to spend some money first.  It’s really an investment that the people behind the business are making, and they’re hoping to not only get their money back (which would be called breaking even) but to make money on top of that (make a profit).  The amount that they make back after making their investment is the ROI, and it’s usually given in terms of a percentage.

So let’s try this out.  Let’s say a business spends $100 on advertising, and they end up getting a client because of it that pays them $150.  That means that they’re getting 50% ROI off of the advertising (because they’re making back what they invested plus 50% of that amount as well).  Or if a business spend $100 on advertising and made $500 off of it in sales, that would be a 500% ROI.  Pretty amazing!  What if a business spent $100 on advertising, and made $100 from a new client that found them because of the advertising?  That would be a 0% ROI situation.  Obviously you want more than 0…I don’t think anyone would ever even say something had a 0% ROI, they would just call that  breaking even.  But anyway, you get the idea.  The higher the better.

The principle of Return on Investment can be applied to a lot of things, not just money.  It’s kind of just a general principle in business that refers to getting back more than what you initially put in, which is always the goal.  You never want to lose what you invested, you want to gain something from it.  And sometimes it’s hard to know going in whether you’re going to or not, which is the tricky part.

If my understanding is correct, ROI is really just common sense, being smart with one’s resources.  Heck, we’ve all probably used it in our own decision-making situations and not even known we were doing it.