What is ROI?
Return on Investment
TL;DR
ROI (Return on Investment) measures how much money you make back relative to what you spent. It tells you if an investment was worth it.
Example
Simple ROI calculation:
You spend 50,000 kr on a new website. Over the next year, you can attribute 200,000 kr in new business directly to that website.
ROI = (Gain - Cost) / Cost × 100 ROI = (200,000 - 50,000) / 50,000 × 100 = 300%
For every krone you invested, you got 3 kroner back.
More examples:
- You spend 10,000 kr on ads and generate 25,000 kr in sales → 150% ROI
- You spend 100,000 kr on a software tool that saves 20,000 kr/year → Takes 5 years to break even (not great unless it has other benefits)
- You spend 5,000 kr on an online course and it helps you land a job paying 100,000 kr more → Massive ROI
Explanation
The ROI Formula
ROI = (Net Profit / Cost of Investment) × 100
Or expanded: ROI = (Final Value - Initial Investment) / Initial Investment × 100
Types of ROI
Financial ROI - Direct monetary returns (most common usage)
Time ROI - Hours saved vs. hours invested in learning/implementing something
Strategic ROI - Harder to measure benefits like brand awareness, customer satisfaction, or competitive positioning
ROI vs. Other Metrics
- ROI answers: "Was this worth the money?"
- Payback Period answers: "How long until I break even?"
- NPV (Net Present Value) answers: "What's this worth in today's money?" (accounts for time value)
- IRR (Internal Rate of Return) answers: "What's the effective interest rate of this investment?"
Limitations of ROI
- Doesn't account for time - 100% ROI over 1 year is very different from 100% ROI over 10 years
- Hard to attribute - Did the new website cause the sales, or was it the sales team?
- Ignores risk - A safe 20% ROI might be better than a risky 100% ROI
- Can be manipulated - What counts as a "cost" and what counts as a "return" can be subjective
Why It Matters
For Business Owners
Make better decisions. ROI helps you compare different investment options objectively. Should you spend money on marketing or product development? Calculate the expected ROI of each.
Justify spending. When you need to convince stakeholders (investors, board members, yourself) that an expense is worthwhile, ROI provides a concrete number.
Measure what matters. Tracking ROI forces you to think about outcomes, not just activities. "We launched a campaign" means nothing. "The campaign delivered 250% ROI" means everything.
The Bigger Picture
ROI is just one tool. Don't become so focused on measurable returns that you ignore important but hard-to-measure investments like team culture, R&D, or brand building.
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