What Is ROI? A Guide to Measuring Return on Investment

ROI is one of the key metrics businesses can use to assess whether an investment generates worthwhile returns, whether the investment is in a project, technology, marketing, or various assets. ROI presents results as a percentage, making it useful for analyzing performance, comparing alternatives, and supporting business decisions.

This article explains what ROI is and why it matters, how to calculate ROI, how to analyze ROI values, and provides a simple example of a basic calculation.

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Key Takeaways

• ROI (Return on Investment) is a metric used to evaluate the value of an investment. It shows how much return an investment generates and helps businesses plan and make decisions more effectively.
• ROI analysis should take other factors into account such as the investment period, costs, risks, and business objectives to provide a well-rounded assessment of an investment's value.
• ROI can be used to evaluate technology investments including back-office management systems, automation, and online payment systems, by considering both the returns generated and the costs reduced.
• An effective online payment system can help improve a business's ROI by increasing revenue opportunities through fewer lost sales, supporting credit card payments and installment plans, and reducing costs and back-office workload.

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Table of Contents

• What Is ROI?
• Why Is ROI Important to Businesses?
• How Is ROI Calculated?
• How Can ROI Be Analyzed?
• How Can Businesses Increase ROI?
• Limitations of ROI to Be Aware Of
• Frequently Asked Questions (FAQs)
• ROI as a Tool for More Effective Investment Planning

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What Is ROI?

ROI stands for Return on Investment. It is a metric used to assess how much profit or loss an investment in a project, asset, or activity generates relative to its cost. In general, ROI helps businesses understand the value of an investment and use the information to plan and make personal business decisions more effectively. 

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Why Is ROI Important to Businesses?

ROI is a metric that helps businesses assess the value of their investments and gain a clearer picture of the results of their operations. The key benefits of measuring ROI include the following: 

• Helps assess the value of an investment Businesses can use ROI to evaluate how much return projects, assets, or various activities generate compared with their total costs. 
• Helps plan investment spending ROI can be used to compare the performance of projects with different investment amounts in percentage terms, providing an initial indication of which option offers better returns.
• Helps plan budget allocation Businesses can use ROI data to allocate budgets to projects or activities that are likely to generate returns and support business objectives.
• Helps monitor project performance Regular ROI measurement helps businesses determine whether projects are meeting their goals and consider whether to continue investing, adjust strategies, or review budgets. 
• Helps evaluate technology investments ROI can be used to assess investments in systems or technologies such as internal management systems, automation, or online payment systems. For example, adding options for online credit card payments and online installment payments may make payments more convenient for customers and increase sales opportunities. Businesses can assess the results through increased revenue, reduced costs, or improved operational efficiency.

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How Is ROI Calculated?

ROI is calculated by dividing the net return by the investment cost and multiplying the result by 100 to express it as a percentage. This helps assess how worthwhile an investment is. The ROI calculation formula is as follows:

• Determine the investment cost Identify the amount invested and related expenses, such as installation fees, service fees, operating expenses, or maintenance costs.
• Determine the value of the returns received Calculate the revenue, benefits, or value generated by the investment over the period being measured. 
• Calculate the net return Subtract the total investment cost from the value of the returns received from the investment.
• Calculate ROI Divide the net return by the initial investment and multiply by 100 to express the result as a percentage. The ROI formula is as follows: 

ROI (%) = (Net Return √∑ Initial Investment) √ó 100

Where net return = Value received from the investment – Investment cost

For example, if a business invests THB 100,000 in a project and receives a total value of THB 120,000, its net return is THB 20,000. 

• ROI = (20,000 √∑ 100,000) √ó 100
• ROI = 20%

This means the project generated a net return equivalent to 20% of the investment cost.

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How Can ROI Be Analyzed?

Analyzing ROI helps businesses gain an initial understanding of investment returns and value. ROI can be interpreted as follows:

• Positive ROI means the value received from the investment exceeds its cost, resulting in a profit. However, it is also important to consider whether the return is appropriate for the investment period and level of risk.
• ROI equal to 0% means the value received equals the investment cost, so there is neither a numerical profit nor a loss. Businesses should also consider opportunity costs and other benefits.
•  Negative ROI means the value received is lower than the cost, resulting in an investment loss. Businesses should investigate relevant factors, such as revenue falling below target, costs exceeding estimates, or inefficient operating processes. They should then assess whether the investment remains appropriate and plan any necessary strategic adjustments.
• High or low ROI A high ROI indicates that an investment generates substantial returns relative to its cost, while a low ROI indicates that returns make up a relatively small proportion of the cost. However, a higher ROI is not always necessarily better, as investments may differ in duration, risk, and liquidity. ROI should therefore be compared with investments of a similar nature.

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How Can Businesses Increase ROI?

ROI can be increased in two ways: by increasing returns or reducing costs. Payment systems can help with both, as follows:

• Reduce lost sales during checkout Some customers select products but do not complete payment because the process is complicated, their preferred payment method is unavailable, or the transaction fails. Making checkout shorter and smoother can help convert more purchase intent into actual sales.
• Increase average order value Offering installment payments can make it easier for customers to decide to purchase higher-priced products, increasing revenue per order.
• Encourage repeat purchases Customers who can pay conveniently may be more likely to return, especially for businesses with monthly billing or membership models, where retaining existing customers often costs less than acquiring new ones.
• Reduce back-office costs Use a system that automatically summarizes transactions and reconciles incoming payments instead of checking them manually, helping reduce working time and errors.
• Reduce losses from fraudulent transactions Systems that meet security standards help reduce the risk of unauthorized card use and chargebacks, which are hidden costs that directly affect ROI.

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Limitations of ROI to Be Aware Of

Although ROI is easy to calculate and provides an overall view of an investment's value, there are limitations to consider.

• It does not directly reflect the investment period. For example, an ROI of 20% over one year differs in context from an ROI of 20% over five years.
• It does not automatically account for risk. An investment with a high ROI may also carry higher risk.
• The result depends on the costs included in the calculation. If some expenses are omitted, the ROI may appear higher than it actually is.
• It does not reflect cash flow at each point in time, especially for projects with multiple rounds of income and expenses.
• It may not cover benefits that are difficult to quantify financially, such as customer satisfaction, brand image, or team productivity.

Basic ROI does not account for time, inflation, and all risks. Businesses should therefore use it alongside other information or analytical tools as appropriate, such as the payback period, NPV, or IRR.

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Frequently Asked Questions (FAQs)

What Is Considered a Good ROI Percentage?

There is no fixed percentage that defines a good ROI, as it depends on the type of investment, duration, risk, cost of capital, and business objectives. Businesses should compare ROI with their targets, historical results, industry benchmarks, and returns from other alternatives with similar risk levels to support appropriate decisions.

What Is the Difference Between ROI and ROE?

ROI and ROE are both financial return metrics, but they serve different purposes. ROI measures the return on an investment, while ROE measures a company's ability to generate profit from shareholders' equity.

Can ROI Be Used to Measure Marketing Returns?

Yes. Businesses can compare the profit or value generated by a campaign with the cost of running it. However, they should clearly define which returns and costs to include, as well as the period used for measurement, so the results can be compared appropriately.

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ROI as a Tool for More Effective Investment Planning

Businesses can use ROI to monitor performance, compare alternatives, and support budget allocation. However, ROI should not be considered in isolation. The investment period, risk, cash flow, related costs, and business objectives should also be taken into account to support more well-rounded decisions.

When investing in a payment gateway or online payment system, businesses should consider not only short-term returns but also long-term value. Merchants should take transaction volume, business operations, and customers' payment needs into account when choosing a suitable system that can support future business growth. For more information about online payment services, KGP is ready to recommend payment solutions suited to each business's needs.

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