The ROI formula and how to apply it

ROI (return on investment) is the ratio of the net profit from an investment to its cost:

ROI = (Profit from the investment − Amount invested) / Amount invested × 100%

An example for a personalization platform:

Cost of the platform (year): $400,000
Revenue lift: $4,000,000
Gross margin: 25%
Additional margin: $4,000,000 × 25% = $1,000,000
ROI = ($1,000,000 − $400,000) / $400,000 × 100% = 150%

Important: the denominator must hold the real cost of every part of the investment — not only
the licence, but integration work, internal team effort and training as well.

ROI vs ROAS vs ROMI

Metric Numerator Denominator Use
ROI Net profit All investment Assessing any project or technology
ROMI Incremental margin Marketing spend Assessing marketing campaigns
ROAS Revenue from advertising Ad spend Assessing advertising channels

ROAS often looks more attractive than ROI — because it does not subtract the cost of goods. A ROAS
of 300% at a 30% gross margin means a real ROMI of roughly 0%: the advertising is not paying for
itself.

TCO: total cost of ownership

To calculate the ROI of an IT solution correctly, count TCO (total cost of ownership) rather than
the licence fee alone:

  • Licence / subscription — the annual payment
  • Integration work — the one-off cost of deployment (development, testing)
  • Internal team effort — the time spent on launch and ongoing management
  • Support — the ongoing work with the platform
  • Training — onboarding new team members

Integrating a typical e-commerce solution adds 20–40% to first-year TCO on top of the bare licence.

Incremental ROI: harder than it looks

The revenue growth that follows a deployment is not the same as the effect of the tool — part of
that growth would have happened anyway. Correct ROI is measured on the incremental effect: how
much revenue the platform added on top of the baseline trend.

The method: an A/B test or a holdout group. The difference in revenue between the group with
personalization and the group without is the incremental effect, with no statistical assumptions
attached.

Payback period

Alongside ROI, the payback period matters — how many months it takes for the investment to pay
for itself:

Payback Period = Investment / Monthly margin gain

At an ROI of 200% over a year, the payback period is roughly four months. For a CEO or CFO that is
often more important than the absolute ROI: a short payback lowers the risk and makes the investment
decision simpler.