In brief: ROI, or return on investment, expresses the ratio of an investment’s net return to its costs. It is meaningful only when the boundaries of both return and costs are clear.
How I use ROI in practice
First I describe the investment and period. For a new website I count not only development, but also content, internal time, operations and process changes. The return need not be immediate revenue; it can be saved work or fewer errors, but the valuation method must be documented. I add the payback period and an uncertainty scenario, because the same ROI over three months and three years does not represent the same decision.
What to watch out for
The most common error is dividing revenue by costs and calling the result ROI. The cost of delivering what was sold and other investments are missing. The second error is attributing all growth to the project without a control perspective.
Questions for a decision
- What exactly is the investment and what is its return?
- Are we counting net return or revenue?
- How long until the money returns?
- How does the result change in a cautious scenario?