You then also have to subract the cost of the investment to get to the Return, this divided by the investment gives you the ration or Return to Investment = ROI. An ROI of 100% means you brokeeven. To the author’s point, in this case if had done nothing, the result (on a Return basis) would have been the same. Of course the program increased Revenue but it did not incrementally increase the profit of the company, so the next impact was $0 on a Return basis.

If you want to use Revenue as your metric, then Return on Ad Spend (ROAS) or Sales to Cost are more appropriate. The online display guys bastardized ROAS by using Revenue because it made the numbers look better. Keep in mind, these metrics need to account for Cost of Goods or Cost of Revenue, so you need to at least be in the 200%-400% range if you care about profitability.

The author states that the marketing investment $65,000 and the revenue is $130,000. The product cost is $65,000 as well which means total investment is $130,000. When you plug these figures into the formula I stated above you get 0.

ROI should always be calculated using the total expenditure, not just marketing expenditure. In business you will always have the operations process whereby goods are created (productions costs) or services are rendered (labour costs). Marketing, though a value added service may not always be required. You can spend $65,000 to build a product and sell it to an available buyer for $130,000 while spending $0 on marketing. But what you can’t do is spend $65,000 on marketing and $0 on production cost because you have no product to sell unless you got the product for free or it appeared out of thin air. “Marketing ROI” is a misnomer and misleading unless you attribute it to the additional revenues gained by marketing activities.

He looks at the ROI of a campaign, but didn’t explain how to calculate it. This helped.. even though in the book he did not take his expenses into the equation..and just did profit/expenses. I think this is a more accurate way of doing it.

He got a 3.75 ROI and with your formula it gave me 2.75.

Many of you seemed to have missed the fact that the article presumes that 130,000 was the gross revenue (not gross “profit”), and that the production expenses were 65,000 (presumed for the example but not accurate of the case subject). After the “production expenses” the author added “marketing expenses”, an additional 65,000. So the total expenses were 13,000. So if the “total expenses” are 13,000 then in Simons calculation we have
ROI = (Revenues – Expenses) / Expenses
or
ROI=(13,000-13,000)/13,000
which STILL solves to 0!
I don’t know what the heck the calculation for ROI should be, but you should read an article at least twice before leaving a comment or dissing others. (i.e. “The person who wrote this article must not have a background in finance.” – not cool dude)
Thanks to the author, you have helped me a lot.

Actually the author of this post is correct in their calculations.

They are taking into account the profit margin which is 50%. So it does come out to 0. You are not.

Profit Margin- $130,000 * .5 (or 50% which is pretty much Cost of Goods Sold)= $65,000

$65,000 is your Gross Profit minus Cost of $65,000 which will end up being zero.

Still have a way towards earning that degree, huh.

As a finance major and auditor I can confirm that:
ROI = (Revenues – Expenses) / Expenses
So in this example ROI=(130,000-65,000)/65,000 or 100%

If the project takes place in a period that is greater than a year you will have to use present value calculations to discount the return to a more realistic value. (Following the whole idea of money is worth more now than it is to me in 5 or 10 years..). You can find on-line calculators to do this for you or hire a finance grad like myself, haha.

And, gross profit would have already factored in gross revenue.

The formula, as described in the above scenario, is correct: a marketer who spends $65,000 in media buys to produce $130,000 of revenue, of which only $65,000 is gross profit, is not earning a true 100% return on investment.

Perhaps the author means that the numerator should subtract both DIRECT costs (the costs directly attributable to producing goods and services) and some allocation of INDIRECT costs (the costs not directly attributable, such as administrative salaries and office lease expenses).

The author also likely doesn’t understand the definition of GROSS REVENUE, but that’s a discussion for another time.

If you invest $65,000 into a venture and it makes $130,000, then your return on investment is 100%.

ROI is calculated: (Revenue – Investment) / Investment

The way you seem to have it set up is $130,000 in revenue, $65,000 COGS and then an ADDITIONAL $65,000 in other costs. If that’s the case, what you have written is correct. Otherwise, the only cost in this scenario from what your example stated is $65,000 and the gross profit is $65,000 and you divide this by $65,000 (initial cost) and that = 1 or 100%.

(130 000 Gross revenue – 65 000 Cost of investment) = 65 000 profit

(65 000 profit – 65000 investment) = 0

Zero divided by any investment amount is going to be zero.

Cheers.

Now in percentages 1.00 is 100 % right?

Please help me to understand this Thanks