Making smart financial decisions isn’t just about spending money - it’s about ensuring that every dollar spent brings real value. Whether you're investing in a new product, a marketing campaign, or even a piece of software, Return on Investment (ROI) is the metric that tells you if it was worth it.
ROI is one of the most commonly used business metrics because it gives a clear, straightforward way to measure the success of an investment. But how does it actually work? And why should you care? Let’s find out.
What is ROI?
ROI, or Return on Investment, is a simple formula that helps businesses and individuals measure the profitability of an investment. It’s expressed as a percentage, showing how much you’ve gained (or indeed lost) relative to what you initially invested. Think of it this way: if you spend $1,000 on something, you want to know if you’re making $1,500 back - or just $500. ROI makes it easy to compare different investments and decide where to put your money for the best returns.
How do we calculate ROI?
To calculate the return on investment we use the following simple formula:
ROI (%) = ( Net Profit / Cost of Investment ) × 100
where:
Net Profit = Total Revenue - Initial Investment
Cost of Investment = The amount spent on the investment
This formula works whether you’re evaluating a marketing campaign, a new software purchase, or a business expansion - it’s all about understanding the financial impact.
Example
Let’s say you spend $5,000 on a marketing campaign, and as a result, your business earns $8,000 in additional revenue. Here’s the breakdown:
Total Revenue: $8,000
Initial Investment: $5,000
Net Profit: $8,000 - $5,000 = $3,000
Now, using the ROI formula:
( 3,000 / 5,000 ) × 100
= 60% ROI
Why does ROI matter?
ROI isn’t just a financial metric - it’s a critical tool for smart decision-making in business. Here’s why it’s so important:
🆚 It helps compare opportunities
Businesses often have multiple investment options, from launching new products to expanding marketing efforts or upgrading technology. When presented with competing Business Cases, ROI provides a standardized way to compare them, ensuring resources go to the Business Case with the highest potential returns.
🤔 It improves financial decision-making
Every company operates with limited budgets and competing priorities. ROI ensures that decisions are based on tangible returns rather than assumptions, helping leaders allocate resources efficiently and avoid wasteful spending.
🕰️ It measures past success (or failure)
Tracking ROI allows businesses to evaluate the effectiveness of past investments. If a previous marketing campaign delivered a 200% ROI, it might be worth scaling up. If another project barely broke even, it signals a need to adjust strategy or reallocate funds.
💪 It strengthens stakeholder confidence
Whether you’re securing funding from executives, investors, or finance teams, a strong ROI demonstrates the financial viability of your proposal. The clearer the ROI, the easier it is to gain approval and buy-in.
🔄 It supports continuous improvement
By regularly measuring ROI, businesses can fine-tune their strategies. If a certain product line is underperforming, leaders can pivot to higher-yielding initiatives instead of continuing to invest in areas with low returns.
What can ROI be used for?
ROI is one of the most versatile metrics in business, applicable across multiple areas. Here’s how it helps companies optimize their investments:
🏢 Software & Tools
Businesses invest heavily in SaaS tools, cloud services, and enterprise software - but do they actually pay off? With KangaROI you can track the real-time impact on ROI to measure whether a new CRM system is increasing sales, whether an automation tool is reducing labor costs, or whether a subscription is worth renewing based on the perceived efficiency gains it was purchased for.
🛠 Engineering & Product Development
Not all product features or technical improvements provide the same value. Using KangaROI you can utilize ROI to help prioritize engineering backlogs, ensuring that teams focus on features and optimizations that deliver the highest financial impact, rather than just what seems interesting or innovative.
📈 Marketing Campaigns
Companies need to know if their ad spend is bringing in real revenue. ROI helps assess whether a Google Ads campaign, a social media strategy, or an email marketing initiative is generating more money than it costs. By tracking ROI, businesses can double down on high-performing channels and cut back on ineffective ones.
🤝 Business Partnerships & Vendor Deals
Whether negotiating a supplier contract, outsourcing development, or renewing an existing contract, companies need to know if they’re getting more value than they’re paying for. KangaROI uses ROI alongside other financial metrics to help determine whether a vendor is delivering real cost savings or just adding expenses.
📊 Employee Training & Development
Businesses often invest in workshops, courses, and certifications to upskill employees. ROI helps measure whether these training programs lead to higher productivity, better retention, or increased revenue, making it clear whether they’re worth continuing.
🏭 Operational Improvements & Cost Reductions
ROI isn’t just about new revenue - it’s also about cost savings. Whether switching to renewable energy sources, automating workflows, or implementing a more efficient supply chain process, ROI helps businesses see if the cost-cutting measures outweigh the upfront investment.
What are the limitations of ROI?
ROI is powerful but not perfect. Here are some of its key limitations and why businesses should use it alongside other financial metrics:
⏳ It doesn’t consider time
ROI shows how much money is made relative to an investment, but it doesn’t account for how long it takes to achieve those returns. For example, an investment with a 50% ROI over one year is far better than one with a 50% ROI over five years, yet ROI alone wouldn’t highlight this difference. That’s why KangaROI uses ROI alongside metrics like Discounted Payback Period.
⚠️ It doesn’t measure risk
Two investments with the same ROI might have very different risk profiles. One could be a low-risk bond with steady returns, while the other is a high-risk start-up investment that has no guarantee of long-term success. ROI alone doesn’t factor in volatility, market conditions, or the likelihood of success, which is why businesses often combine ROI with risk-adjusted return metrics.
💰 It relies on accurate cost tracking
If businesses fail to properly track hidden costs, their ROI calculations can be misleading. For example, a new software implementation might show strong ROI on paper, but if training costs, integration expenses, and maintenance fees aren’t included, the actual return could be much lower than expected. This is why KangaROI developed Value Realization features to make sure that Business Cases are seen as living documents and the Real ROI is tracked, and not just forgotten about the second approval is granted.
⚖️ It assumes all investments are comparable
ROI works best when comparing similar types of investments, but it can be misleading when used across different industries or project types. A marketing campaign might have a 200% ROI, while a new warehouse might have a 20% ROI - but the warehouse provides long-term stability while the marketing campaign’s impact may be short-lived.
📊 It doesn’t consider external factors
ROI calculations assume that financial outcomes are directly tied to the investment, but outside factors (like market trends, economic downturns, or competitor actions) can impact results. A new product might have strong potential, but a supply chain issue or global recession could lower its ROI through no fault of the business itself.
Summary
ROI is one of the most essential business metrics - it helps companies measure profitability, compare investments, and optimize spending. But while ROI is simple and effective, it’s not the only factor to consider when making financial decisions. This is why KangaROI uses ROI alongside other financial metrics like Net Present Value (NPV) and Discounted Payback Period when helping you build your Business Cases and prioritize your Engineering backlogs. If you’re not a customer yet then reach out and schedule a demo today so that you can start planning smarter and getting better results!
