When it comes to spending money, whether by starting a business, marketing our business, or investing, you need to be able to track the effectiveness of your spending. Otherwise, you have no idea if it’s a good investment or tactic.
By calculating your ROI, you can determine if you are actually earning a profit, and if so, how effective is your earning potential. You can then compare it to other opportunities to see what you should be focusing on.
But what is a good ROI? Well, it depends on what you are considering. Investments, business, and marketing campaigns will all have different ROI potentials and averages.
Keep reading to learn how to calculate your ROI and what you should be aiming for.
Defining ROI
ROI, or return on investment, is a calculation that helps you compare the effectiveness of your investment. Basically, it’s how much you earn as a result of how much you invested.
Let’s use a simple investing example. Say you invested $10,000. After one year, you now have $10,500. You’ve earned $500. Using a simple ROI calculator, you have a 5% ROI.
Investors compare the effectiveness of current or potential by looking at ROI. If one type of investment averages 3% per year and another type of investment averages 7% per year, which should they go with?
Wondering how to calculate ROI? Take your total amount of money, or value earned. In the example above, it would be $10,500. Subtract the initial investment, which was $10,000, giving us $500. Then divide that number by the initial investment.
Your answer is your ROI in decimal form. Multiply by 100 to get your percentage. In our case, 0.05 x 100 = 5% ROI.
What Is a Good ROI?
When it comes to an ideal ROI, there’s no one-size-fits-all. It’s different for every business, every investment, and every marketing campaign.
There are so many factors at play. Let’s look at a few examples
What Is a Good ROI for a Business? What Is a Good ROI for a Startup
Whether you have a full flown business, or you are wondering what is a good ROI for a project or side hustle, again, there is no one singular answer.
Considering that many investments earn decent ROI, you want to ensure the business you are starting or running can earn more than what an investment can make you.
Rental real estate, if done well, can earn you a 10% to 12% ROI. Investing in index funds in the stock market can earn you an average of 7% ROI. Your business should be earning more.
Real Estate Investment
There are many different types of real estate investment, each with different ROI potential. The main goals are to beat inflation as well as the stock market.
If you can earn over 7% ROI on your long-term rentals, you are doing pretty good. Real estate experts say that 10% to 12% is ideal for rentals.
Flipping homes can usually earn a much higher ROI. But there is more risk involved.
Marketing Campaigns
It’s crucial for businesses to calculate their ROI when it comes to marketing and advertising. When a business spends $1,000 on advertising, they want to see a positive ROI to know their money is well-spent.
Different types of advertising campaigns have different ROI potentials. Some, such as TV or radio adverts can be very difficult to track.
Let’s say you are focusing your advertising on YouTube. It’s a similar advertising strategy as TV commercials, except that users can click right away to see your website or products. If you choose high quality placement for YouTube ads, you can potentially earn more than double the ROI that you can with television.
Are You Earning Enough?
So what is a good ROI? Usually, anything above 10% is pretty good. Though for some marketing campaigns, you should be earning much more.
Compare the amount you earn to the earning potential of other strategies. Also factor in the amount of work it takes to earn your current ROI. Is it passive, or is it work-intensive? This will help you decide if your current strategies are worth it.
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