Skip to Content

What is ROI (Return on Investment)?

image

Definition​

ROI is a number that shows "how much return I got for the money I spent." In English, it stands for Return on Investment, and simply put, it's a calculation that tells you whether your business is doing well or not.

Let me give you an example. Your friend runs a chicken restaurant and spent 100,000 won to distribute flyers around the neighborhood. If customers who saw those flyers came and bought 300,000 won worth of chicken, then they earned 300,000 won from spending 100,000 won. The actual profit is 200,000 won, and if you divide that by the initial investment (100,000 won), you get 200%. This is ROI.

The calculation is really simple: (Earnings - Expenses) ÷ Expenses × 100 = ROI(%). If it's over 100%, you made money; if it's 0%, you broke even; and if it's negative, you lost money. That's why business owners always ask, "What's the ROI on this ad?" It allows them to see at a glance whether it's worth spending money or not.

Characteristics​

  • Clear numbers - Instead of "seems to be going well," it shows exact figures like "200% profit," making it easy for anyone to understand
  • Easy to compare - Just looking at ROI tells you immediately whether Instagram ads or YouTube ads are better
  • Easy to decide - It's easy to make decisions: stop ads with low ROI and spend more money on ads with high ROI
  • Can be used anywhere - Whether it's a chicken restaurant, clothing store, or online shopping mall, you can calculate ROI for all of them
  • Constantly changes - Today's ROI and next month's ROI can be different, so you need to keep monitoring it

How to Use​

To properly utilize ROI, you first need accurate records. Let's think about running a local café.

Step 1: Record What You Spend If you spent 50,000 won on Instagram ads, write it down somewhere. It doesn't matter if it's a notebook or Excel. Like this: "November 23, 2024, Instagram advertising cost 50,000 won."

Step 2: Check How Much You Earned from That Ad This is the tricky part. It would be nice if customers said "I came because I saw Instagram," but most don't. That's why coupons work well. If you create a coupon like "500 won off Americano if you came from Instagram," you just need to count how many customers used that coupon.

Step 3: Calculate If 20 customers used the coupon and each spent an average of 8,000 won, that's a total revenue of 160,000 won. You need to subtract the cost of goods like ingredients. Usually, cafes have a cost of goods around 30%, so the net profit is about 110,000 won. Then (110,000 won - 50,000 won) ÷ 50,000 won × 100 = 120% ROI.

Step 4: Act Based on Results 120% ROI is pretty good. You spent 50,000 won and made 60,000 won in profit. At this rate, it's worth doing Instagram ads next month too, right? If the ROI was negative, you'd need to change your advertising method or try something completely different.

Step 5: Check Consistently It's not one and done. Calculate ROI monthly or weekly. It can vary by season and day of the week. ROI might be high during the Christmas season but drop in January.

Examples​

Example 1: Local Tteokbokki Shop Cheolsu runs a tteokbokki shop in front of a school. He distributed 20,000 won worth of flyers to students. That week, 50 students came with flyer coupons and ate an average of 5,000 won each, generating a total revenue of 250,000 won. If the cost of goods for tteokbokki is 40%, the net profit is 150,000 won. ROI is (150,000 won - 20,000 won) ÷ 20,000 won × 100 = 650%. Jackpot! He should definitely distribute flyers next time too.

Example 2: Online Shopping Mall Younghee runs an online shopping mall selling handmade accessories. She spent 100,000 won on Facebook ads, and among those who came from the ad, 15 people bought items with a total revenue of 450,000 won. After subtracting material and shipping costs, she had about 200,000 won in net profit. ROI is (200,000 won - 100,000 won) ÷ 100,000 won × 100 = 100%. Better than breaking even, but there's room for improvement.

Example 3: YouTuber Minsu is a gaming YouTuber who spent 300,000 won on video editing outsourcing. Thanks to that, his video quality improved, subscribers increased, and that month's ad revenue was 800,000 won. ROI is (800,000 won - 300,000 won) ÷ 300,000 won × 100 = about 167%. You can see that outsourcing editing is much more profitable than doing it himself.

Example 4: Gym A local gym placed an ad in the newspaper for 200,000 won. 15 people who saw the ad signed up for 3-month memberships (150,000 won per person). Total revenue is 2,250,000 won, but after subtracting trainer salaries and facility maintenance costs, about 1,000,000 won in net profit remains. ROI is (1,000,000 won - 200,000 won) ÷ 200,000 won × 100 = 400%. Newspaper ads work better than expected!

Pros and Cons​

Pros​

  • Easy to understand - Anyone can easily understand the concept of "invested this much and earned that much." You don't need to be an accounting expert
  • Can make decisions quickly - Spend more money on high ROI and reduce or eliminate low ROI, so decisions come fast
  • Can be used everywhere - Can be used not only for advertising but also for employee training, equipment purchases, store interior design, and anywhere else money is spent

Cons​

  • Easy to focus only on immediate results - Long-term effects like brand awareness are difficult to measure with ROI. For example, investing in good packaging may show low ROI right now, but regular customers may increase later
  • Often difficult to measure - Especially for offline stores, it's hard to track where customers learned about your store. It gets more complicated if you advertise in multiple places simultaneously
  • Can become obsessed with numbers - ROI isn't everything. Even if ROI is low, if customer satisfaction increases, it can be beneficial in the long run

FAQ​

Q: What percentage of ROI is considered good? A: It varies by industry, but generally, if it's over 100%, you've at least broken even. 200-300% is pretty good, and if it exceeds 500%, it's excellent. But the most important thing is comparing it with your other ads or competitors. If your Instagram ads have 150% ROI but Facebook has 300%, it makes sense to focus on Facebook, right?

Q: Should I include my time when calculating ROI? A: It depends on the situation. If you spent all day creating and running the ad yourself, you should consider that time as a cost for accuracy. Think like this: "My daily wage is 100,000 won, and it took two days to create the ad, so I should add 200,000 won to the ad cost." However, for simple comparisons, sometimes people calculate only the money that directly went out.

Q: My ROI came out negative. Is it a complete failure? A: Not necessarily. Think of your first ad as a test period. You may have lost money this time, but you learned what messages don't work and what time slots aren't good, right? Based on that experience, you can do better next time. However, if you keep getting negative results, you need to completely change your strategy.

Q: I do both online and offline. How do I separate ROI? A: Use different coupons or tracking codes for each channel. For example, use the "INS2024" coupon for Instagram ads and "PAPER2024" for flyers. Then you can see which coupon generated sales and calculate each ROI separately. Or you can directly count the number of customers who say "I came from Instagram."