If you’re on a finance team, every dollar matters. You want to know if hiring that engineer pays off faster than launching a new marketing campaign. You compare a product expansion to doubling down on your best channel. Return on investment gives everyone a common language, but only if you measure it right and know where it falls short.
Return on investment (ROI) looks simple. Spend money, get returns, divide one by the other. But there’s a lot under the hood. A 50% ROI looks great until you see it took five years, you missed counting half your costs, or you could’ve earned 60% somewhere else. For model owners, nailing ROI means understanding the formula, knowing when to use it, deciding what counts, and knowing when it’s time for more advanced metrics.
This guide breaks down the formulas, variants, and practical points you need when it’s time for real capital allocation calls and tight budgets.
Understanding return on investment (ROI): definition and formula
Return on investment measures profitability. You compare earnings against the initial investment. It shows your return as a percentage of upfront spend. The formula looks like this:
ROI = (Net profit / Cost of investment) × 100
Net profit acts as your earnings minus spend. Cost of investment is what you paid upfront. Did you spend $10,000 on a campaign that brought in $15,000 profit? That equals a 50% ROI.
You will also see this version:
ROI = [(Current value of investment - Cost of investment) / Cost of investment] × 100
Both formulas reveal what you got back compared to what you put in. Percentages make comparison easy. A 30% ROI on a $5,000 stock purchase is just as efficient as a 30% ROI on a $50,000 real estate down payment when looking at efficiency.
Watch out for timing. ROI doesn’t capture timing. Getting a 50% return in one year beats getting it in five years. Standard ROI ignores the calendar. That limitation shapes when you use it.
ROI variants and advanced methods
Standard ROI works for quick checks. Finance teams need precision while balancing timelines, risks, and cash flow shapes. Common variants make ROI smarter.
Annualized ROI
Annualized ROI calculates your rate of return per year. This helps compare a three-month project fairly against a two-year initiative.
Annualized ROI = [(Ending value / Beginning value) ^ (1 / Number of years)] - 1
Example: You invest $100,000 and it turns into $150,000 in three years. Total ROI sits at 50%. Annualized, it settles around 14.5%. This creates an honest comparison against a project that returns 20% in a single year.
Incremental ROI
Incremental ROI measures returns from additional investment. It helps marketing and sales teams see if extra spend in a channel still performs.
Incremental ROI = [(Revenue from test group - Revenue from control group) / Additional marketing investment] × 100
Say you spend $50,000 monthly on paid search. You want to bump that to $75,000. Incremental ROI shows if that extra $25,000 delivers. The first $50,000 might perform well, but extra investment often sees diminishing returns.
Discounted ROI and time value of money
Money today creates more value than the same amount tomorrow. Inflation, risk, and immediate potential impact value. Discounted ROI applies a discount rate to future cash flows.
This concept meets net present value (NPV). NPV measures profitability by bringing future cash flows back to today’s value. It compares that against your upfront spend. It puts timing and risk into the equation.
If your cost of capital is 15%, your project needs to clear it. A 12% ROI falls short once you count alternative uses for your cash.
Why ROI matters in financial decision-making
Return on investment thinking powers finance. It drives capital allocation decisions continuously.
ROI sets the budget in marketing and sales. Support clear ROI with more budget. Move dollars from low performers to high performers. The SaaS standard for LTV:CAC is about 3:1. Every dollar spent getting a customer brings back three over their lifetime. It acts as an ROI target for acquisition spend.
Hiring relies on ROI too. It helps determine if adding headcount pays off. Does an engineer generate enough revenue? Will a new salesperson hit quota fast enough to cover their ramp? These are ROI questions.
ROI connects to everyday metrics:
- Payback period tells you how fast you recover an investment
- IRR (internal rate of return) provides the rate where NPV hits zero to help compare options
- Cost-benefit analysis acts as a close cousin to ROI with more focus on broader costs and benefits
Use NPV-style analysis for bigger plays like new product lines. Unlike simple ROI, NPV shows when you get your money back, not just how much. That visibility matters when managing cash flow.
Key components and considerations
Accurate ROI requires detailed accounting of costs and returns. Miss a cost or miscount revenue and the number loses meaning.
Defining investment cost
Start with direct costs:
- software licenses
- ad spend
- contractor fees
- equipment
Look beyond the obvious.
- Indirect costs count. If your team spends time on a project, account for it. Staff time, software, and office space add up.
- Opportunity cost matters. Opportunity cost is what you give up choosing one option over another. Funding Project A might mean skipping Project B.
Opportunity cost = Return on best foregone option - Return on chosen option
Opportunity cost gets baked into the discount rate during NPV analysis. A positive NPV means your return beats your opportunity cost. Know your cost of capital to set a decision baseline.
Measuring returns
Returns take many forms. Look for revenue generated, cost savings, or productivity gains. A tool that saves your team 10 hours a week delivers value even if it does not appear on the top line.
Attribution gets tricky with multiple touchpoints. Use a holistic approach rather than just crediting the last click.
Time horizon and ongoing costs
Pick the right time frame. Three months might miss long-term returns. Aim for at least 90 days for content marketing rather than 30.
Know the difference between one-time and ongoing costs. Software might require a big initial spend, but people cost you every month. Reflect this in your calculation.
Intangible and long-term investments
Some investments prove hard to measure. Brand awareness and team culture fit this category. R&D often pays off over time. Do not ignore these just because a specific number remains elusive. Use ranges or scenarios. That creates a good ROI analysis for planning.
Benchmarks and rules of thumb
ROI targets change by investment, industry, and risk. What’s great for a process tweak looks different for venture investors.
- For SaaS customer acquisition, the LTV:CAC benchmark is about 3:1. Spend a dollar, get three back over the customer’s life. That covers acquisition, service, overhead, and still leaves you margin. Under 3:1? Acquisition is too expensive or customers don’t pay enough. Over 5:1? You might be missing growth potential.
- Marketing ROI benchmarks vary by channel and industry. Adtech averages 7:1, business services 3:1, cybersecurity 5:1, fintech 5:1.
- Early-stage SaaS businesses invest 35-50% of revenue in R&D. Public SaaS companies put in 15-25%. R&D is tougher to measure, but software and ICT typically operate at 14-20% R&D intensity.
- Venture investors want bigger returns. They look for 10x or higher to offset higher risk. A 2-3x return can be good for stable business, but not for high-risk bets.
Common pitfalls to avoid
ROI analysis goes sideways if you miss the basics. Avoid these traps so your analysis stays honest and useful.
Incomplete cost accounting
Missing indirect expenses and staff time trips up ROI fast. Track both direct and indirect costs to get the full picture.
Ignoring the time value of money
ROI misses how long an investment takes to pay off. A 50% ROI in a year beats 50% in five years. Use annualized ROI or NPV when timelines differ.
Attribution errors
Messy revenue attribution happens often in marketing. Customers interact with your brand many times. Avoid last-click models and stick to multi-touch attribution.
Measuring too early
Some investments need time. Content marketing and hiring take months to pay off. Set timeframes that match how long returns really take.
Confusing ROI with other metrics
ROI isn’t profit margin, revenue growth, or payback period. Each tells a different part of your financial story. Keep your metrics clear.
Ignoring opportunity cost
All positive ROIs aren’t equal. Opportunity cost shows what else you could have earned. A 15% ROI looks less attractive if you could have earned 25% elsewhere.
Not adjusting for risk
Stable and risky investments with the same ROI aren’t the same. Risk deserves higher returns.
Including sunk costs
Don’t use sunk costs in future decisions. That money’s gone. Focus on future gains.
How to calculate return on investment in Runway
Runway doesn't have a single "ROI" button. Instead, you build comparisons using drivers, models, and scenarios. This offers the flexibility to include specific costs and returns that matter to your team.
- Create a model for your metrics. Build a model or drivers table to track comparisons like revenue, gross profit, CAC, cash, or runway. Treat each metric as a driver that tracks values over time.
- Define investment costs. Create drivers for direct costs like ad spend, contractor fees, or software. Include indirect costs like staff time and overhead. Break these out to trace spending more effectively.
- Define return metrics. Create drivers for revenue, cost savings, or productivity. If you evaluate a marketing campaign, track revenue per channel. For hiring, track revenue per employee or productivity gains.
- Build your ROI formula. Create a calculated driver using
ROI = (Revenue generated - Investment cost) / Investment cost. Build separate drivers for different scenarios or timeframes as needed. - Use plans to tag forecast overrides. Tag different initiatives with specific plans. It makes impacts traceable and easy to toggle on or off.
- Create scenarios. Set up one scenario per option and name them clearly. Adjust drivers in each scenario to reflect different investments and returns.
- Compare outcomes side by side. Compare revenue, gross profit, CAC, cash runway, and ROI across scenarios. See exactly which investment delivers and when.
- Add the time value of money. Create a present value driver to discount future cash at your cost of capital. This accounts for timing and provides a deeper look than ROI percentages alone.
- Track opportunity cost. Create a driver that calculates the difference between the return on the best foregone option and your chosen option. Visualize what you give up by choosing one path over another.
- Review and adjust regularly. Schedule weekly tactical reviews and monthly strategy sessions. Update drivers and refine assumptions as results come in. Runway pulls your latest financials so updates reflect real results.
Building ROI in Runway keeps your model linked to real data. When revenue or costs move, your ROI updates automatically. You get live visibility into what works so you can move faster on spend, pricing, and hiring.
Frequently asked questions
Should I forecast ROI or measure it retrospectively?
Successful teams do both. Forecasted ROI acts as the hurdle you clear to get budget approval. Retrospective ROI confirms if the value actually showed up. Comparing your initial forecast against reality reveals where your assumptions drifted. This feedback loop sharpens your ability to call the right shots on future allocation.
Is a positive ROI always good?
A positive number on its own is not enough. You must look at net profitability and opportunity cost. A 5% return looks positive until you realize your cost of capital sits at 10%. Your investment needs to outperform the expense of funding it. Always measure the result against your hurdle rate to determine if you truly added value to the business.
How do I handle investments that do not generate direct revenue?
Quantify calculation efficiency or protection. Employee training or security software rarely puts cash in the bank immediately. Measure the time saved or the risk avoided instead. If a new tool saves an engineer five hours a week, multiply that time by their hourly rate. That cost avoidance acts as your return.
Why do my numbers differ from the finance team's report?
Timing differences and data silos often cause this drift. You might track committed spend while finance records invoiced actuals. Collaborating in a shared environment clears this up. When you build models in Runway, you connect operational plans with live accounting data. Everyone sees the same impact at the same time, which eliminates the version control chase.
Make your ROI work for you
Return on investment is just your starting point. It gives you a common language to compare capital use, but it works best alongside metrics that factor in timing, risk, and opportunity cost.
The real power comes from making ROI a continuous process rather than a single calculation. Runway makes financial modeling accessible and collaborative. Your team gets one workspace to build forecasts, manage expenses, and model hiring. It all connects back to your ROI work.
Set up scenarios inside a single model and compare them easily without extra spreadsheets. Track revenue, expenses, and headcount while working together in one place. You can determine opportunity cost before you act so you always feel confident in your plan.
Ready to turn a static formula into a dynamic planning tool? Book a demo to see how Runway helps finance teams make smarter decisions with real-time insights.