What Is ROI and How Do You Calculate It? The Right Marketing ROI Formula and ROI vs ROAS

What is ROI? (Short answer)

ROI stands for return on investment. It shows, as a percentage, how much net gain every $100 you put into something brings back.

Formula: ROI = (Return − Cost) / Cost × 100. If a $1,000 investment returns $1,300, the net gain is $300 and ROI is 30%. A 0% ROI means you only got your money back; a negative ROI means you lost money.

The same formula works for stocks, equipment, software, training or an ad campaign. What changes the answer is what you put in the 'return' and 'cost' lines. This guide focuses on calculating ROI correctly for marketing and ecommerce decisions.

How do you calculate ROI? Formula and steps

There are three steps: find the total cost for the period, find the return that cost created, then divide the difference by the cost. Multiply by 100 to get a percentage.

Example: a store spends $4,000 on a storefront redesign. The gross profit (after product cost) from the extra sales that follow is $5,200. ROI = ($5,200 − $4,000) / $4,000 × 100 = 30%.

Some sources write ROI as a multiple: return / cost = 1.3. That multiple includes the cost itself. A 30% ROI and a 1.3x multiple describe the same result, but statements like 'ROI should be above 1' mix the two notations. In percentage form, the break-even line is 0%.

• ROI (%) = (Return − Cost) / Cost × 100
• Net gain = Return − Cost
• Return multiple = Return / Cost = 1 + ROI
• Break-even: ROI = 0% (return = cost)

Marketing ROI: why use gross profit instead of revenue?

The most common marketing ROI mistake is putting campaign revenue in the return line. The products you sold also cost money, and that cost would not have been paid without the sale. The return is the gross profit the sales leave you with.

Example: a $6,000 campaign (ads + agency + creative) brings $25,000 in revenue. The products carry a 40% gross margin, so that revenue produces $10,000 of gross profit. Correct ROI = ($10,000 − $6,000) / $6,000 = 66.7%.

The revenue-based version gives ($25,000 − $6,000) / $6,000 = 316.7%, which makes the campaign look nearly five times better than it was. If you sell on a marketplace, compute gross profit after commission, shipping and returns; the marketplace profit calculator gives you that figure per order.

• Marketing ROI = (Gross profit − Marketing cost) / Marketing cost × 100
• Gross profit = Revenue × Gross margin
• Add agency fees, tools, content and team time to ad spend in the cost line

What is the difference between ROI and ROAS?

ROAS (return on ad spend) divides revenue by ad spend: ROAS = Ad revenue / Ad spend. It ignores product cost, shipping and other expenses, which makes it a quick channel signal. ROI measures profit and tells you whether the business actually made money.

If ad spend is the campaign's only cost, there is a simple bridge: ROI = ROAS × Gross margin − 1. Spend $1,000 and make $5,000 in revenue and ROAS is 5; at a 40% margin, gross profit is $2,000 and ROI is ($2,000 − $1,000) / $1,000 = 100%. With the formula: 5 × 0.40 − 1 = 1, or 100%.

Two practical numbers follow. Break-even ROAS = 1 / Gross margin: at a 40% margin, any ROAS below 2.5 loses money. To turn a target ROI into a target ROAS: Target ROAS = (1 + Target ROI) / Gross margin. Someone selling at a 40% margin who wants a 50% ROI needs a ROAS of 1.5 / 0.40 = 3.75. You can check these with your own numbers in the ROAS calculator and the ad budget calculator.

• ROAS = Ad revenue / Ad spend (read as a multiple, e.g. 5)
• ROI = (Gross profit − Cost) / Cost (read as a percentage, e.g. 100%)
• With ad spend as the only cost: ROI = ROAS × Gross margin − 1
• Break-even ROAS = 1 / Gross margin; Target ROAS = (1 + Target ROI) / Gross margin

Why does time matter? Annualized ROI and payback period

The ROI formula has no time in it. An investment that returns 30% in 3 months and one that returns 30% in 3 years show the same ROI but are not the same deal. When comparing investments of different lengths, annualize ROI.

Annualized ROI = (1 + ROI)^(12 / Months) − 1. A 30% return in 6 months: (1.30)^2 − 1 = 69% a year. Simple multiplication (30% × 2 = 60%) ignores compounding and comes out low; on the other hand, annualizing a short lucky result can paint an overly optimistic picture.

Payback period tells you how many months it takes to recover the cost: Payback (months) = Cost / Monthly gross profit. If the $6,000 campaign above produced its $10,000 of gross profit over three months, that is $3,333 a month and payback is $6,000 / $3,333 ≈ 1.8 months. Subscription businesses track the same idea as CAC payback.

• Annualized ROI = (1 + ROI)^(12 / Months) − 1
• Payback period (months) = Cost / Monthly gross profit

First order or customer lifetime? (ROI with LTV)

For products people buy again, first-order ROI is often negative, and that alone doesn't mean the campaign failed. The right question is whether the total gross profit a customer leaves over a set period exceeds the cost of acquiring them.

Example: acquiring a customer costs $60 (CAC). The first order's gross profit is $48, so first-order ROI is ($48 − $60) / $60 = −20%. If the same customer leaves $120 of gross profit over 12 months, 12-month ROI is ($120 − $60) / $60 = 100%.

So always state the window you used: first order, 90 days or 12 months. A business with tight cash flow may not be able to wait 12 months; read long-window ROI together with payback period.

Incrementality: sales that would have happened anyway

The second big ROI mistake is crediting every sale during the campaign to the campaign. Sales from brand searches, loyal customers or organic traffic would have come anyway. The campaign's real return is only the extra (incremental) sales it caused.

Back to the earlier example: if 40% of the $25,000 would have come without the campaign, incremental revenue is $15,000 and incremental gross profit is $6,000. ROI = ($6,000 − $6,000) / $6,000 = 0%. The campaign that showed 66.7% in the dashboard only paid for itself.

Simple ways to estimate incrementality: pause the campaign in one region or for one week and compare sales, report brand search separately from performance campaigns, and compare platform-reported conversions with your own site or accounting data. Even without an exact figure, reporting ROI under two scenarios with an estimated 'would have happened anyway' share is more honest than one inflated number.

How do you calculate ROI on software and automation?

For a CRM, reporting tool or automation, the return is often time saved rather than extra sales. To turn time into money, use hours × hourly cost.

Example: an automation with a total yearly cost (license, setup, training) of $8,000 removes 10 hours of manual work a week. If that person costs the business $40 an hour, yearly savings are 10 × 52 × $40 = $20,800. ROI = ($20,800 − $8,000) / $8,000 = 160%.

A caveat: if the freed hours don't turn into something valuable (more sales or better service in the same time), the saving stays on paper. Report this kind of ROI separately as 'cash' and 'capacity'.

What is a good ROI?

There is no single 'good ROI' for everyone. An investment's ROI should beat the best alternative use of the same money and compensate for its risk. The higher the return money can earn elsewhere, the higher the ROI you should expect from marketing and growth investments.

A practical rule: if a campaign's ROI is above 0%, it pays for itself; whether it also covers fixed costs (rent, salaries, software) is a separate question. Use gross-profit ROI at the campaign level and profit after all expenses at the company level.

• ROI < 0%: the investment doesn't return its cost
• ROI = 0%: break-even; it pays for itself but earns nothing
• ROI > 0%: it earns; compare with alternative returns and risk
• Compare investments of different lengths using annualized ROI

6 common ROI calculation mistakes

These mistakes systematically make ROI look higher than it is:

• Using revenue as the return: subtract product cost, commission and shipping
• Understating cost: agency fees, tools, content production and team time are costs too
• Ignoring time: compare investments of different lengths with annualized ROI
• Not measuring incrementality: remove sales that would have happened anyway
• Trusting platform-reported conversions: the same sale can be counted by several channels
• Forgetting returns: refunded revenue and its shipping should come off the return