ROI, Return on Investment, is one of the most used and most misused metrics in business. It is simple to calculate, easy to understand, and applicable across almost every type of financial decision. But what counts as "good" ROI depends entirely on context: the industry, the timeframe, the risk involved, and what else you could do with the money.
What Is ROI?
ROI measures the return generated from an investment as a percentage of its cost. It answers a simple question: for every pound I put in, how much did I get back?
ROI Formula:
ROI = (Net Profit ÷ Investment Cost) × 100
Or equivalently: ROI = ((Final Value − Initial Investment) ÷ Initial Investment) × 100
Example: You invest £10,000 in equipment. Over two years it generates £14,000 in net profit.
ROI = (£14,000 ÷ £10,000) × 100 = 140%
This means for every £1 invested, you received £1.40 back in profit (plus your original £1, total return is £2.40 per £1 invested).
What Is a Good ROI?
The honest answer: it depends.
A 10% ROI over 20 years is poor. A 10% ROI in one week is extraordinary. A 5% ROI from a government bond is very different from a 5% ROI from a high-risk startup investment. Context determines whether a given ROI is good or bad.
That said, here are commonly used benchmarks:
Stock Market
The long-run average annual return of the S&P 500 is approximately 7–10% per year (inflation-adjusted: approximately 7%). This is often used as the benchmark opportunity cost: if an investment cannot beat the stock market, you might be better off in an index fund.
Small Business / Entrepreneurship
Successful small businesses typically target 15–30% annual ROI on invested capital. Below 15% is generally considered below the risk premium that justifies running a business versus passive investment.
Real Estate
8–12% annual ROI is commonly cited as a good target for property investment (combining rental yield and capital appreciation). This varies enormously by location and strategy.
Marketing ROI
The widely used benchmark for marketing is a 5:1 ratio, £5 of revenue for every £1 spent. A 10:1 ratio is exceptional. Below 2:1 is typically not profitable when you account for margins.
Startup / Venture Capital
Venture capital targets 25–35%+ IRR (annualised return) because most investments fail. The portfolio winners need to cover the losers and still generate acceptable returns.
What Is a Good ROI for a Business?
For internal business investments (equipment, software, training, expansion), a common rule of thumb is that an investment should generate an ROI that exceeds your weighted average cost of capital (WACC), the blended cost of your debt and equity financing.
For most SMEs without complex capital structures, a practical threshold is:
- Below 10%, questionable. The capital might earn more elsewhere
- 10–20%, acceptable, depending on risk and strategic value
- 20–30%, good. Clear value creation
- Above 30%, excellent. Prioritise this investment
However, not all business investments are purely financial. Brand investment, customer experience improvements, and staff training often have ROI that is difficult to measure but is genuinely valuable. Use ROI as one input, not the only filter.
What Is a Good ROI for Marketing?
Marketing ROI is typically calculated as:
Marketing ROI = (Revenue Attributed to Marketing − Marketing Cost) ÷ Marketing Cost × 100
A 500% ROI (5:1 return) is often cited as the baseline for effective marketing. But this depends on your gross margin, a 5:1 ROI on a 20% margin business is very different from a 5:1 ROI on a 70% margin business.
A more useful metric is marketing-attributed gross profit, not revenue:
Marketing ROI (margin-adjusted) = (Gross Profit Attributed to Marketing − Marketing Cost) ÷ Marketing Cost
This gives a more honest view of whether marketing is actually profitable.
For content marketing and SEO, ROI develops slowly (6–18 months to show results) but compounds over time and has a long asset life. For paid advertising, ROI is faster to measure but the gains stop when you stop spending. A good marketing strategy combines both.
ROI vs IRR: Which Should You Use?
ROI does not account for the time value of money. A 100% ROI over 10 years is far worse than a 100% ROI over 1 year, but ROI treats both identically.
IRR (Internal Rate of Return) is the annualised ROI that accounts for when cash flows occur. It is more accurate for comparing investments with different timelines or cash flow patterns.
Use ROI for:
- Quick comparisons
- Single-period investments
- Marketing performance
- Simple equipment or project evaluation
Use IRR for:
- Multi-year projects with cash flows at different times
- Capital budgeting decisions
- Comparing investments of different durations
- Private equity and real estate analysis
How Is ROI Different From Profit Margin?
ROI and profit margin are related but measure different things:
- Profit Margin = Profit ÷ Revenue × 100 (how much of each pound of revenue is profit)
- ROI = Profit ÷ Investment Cost × 100 (how much return on the capital deployed)
A business with a 10% profit margin but very low capital requirements (e.g., a consulting firm) can have a very high ROI. A business with a 30% profit margin but very high capital requirements (e.g., a capital-intensive manufacturer) may have a lower ROI.
Both metrics matter for understanding business performance.
What Are the Limitations of ROI?
Ignores time. A 50% ROI over 1 year is very different from 50% over 5 years. ROI tells you nothing about how long it took.
Ignores risk. A guaranteed 8% ROI is more valuable than a 15% ROI with high variance. ROI does not capture the probability distribution of outcomes.
Attribution is hard. Attributing revenue to a specific marketing campaign or business investment is rarely straightforward, especially for brand investments or multi-touch customer journeys.
Doesn't compare opportunity cost. An ROI of 15% looks good, unless your next best option would have returned 25%.
For important decisions, use ROI alongside IRR, payback period, and a qualitative assessment of risk and strategic alignment.
Frequently Asked Questions
What is a good ROI percentage? Context-dependent. For stock market investment, 7–10% annual return is average. For business investments, 15–30% is generally considered good. For marketing, a 5:1 revenue-to-spend ratio (400% ROI) is the commonly cited baseline.
What is the ROI formula? ROI = (Net Profit ÷ Investment Cost) × 100. Or: ((Final Value − Initial Investment) ÷ Initial Investment) × 100.
What is a negative ROI? A negative ROI means the investment lost money. If you invested £5,000 and got back £3,500, ROI = (−£1,500 ÷ £5,000) × 100 = −30%.
How do I improve ROI? Either increase the return (more revenue or profit from the investment) or decrease the cost (spend less to achieve the same outcome). For marketing, this typically means improving conversion rates and reducing cost per acquisition.
Is 100% ROI good? A 100% ROI, doubling your money, is excellent if achieved quickly (within a year or two). It is less impressive if it took 15 years. Always consider the time dimension when evaluating ROI.
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