What Is Return on Investment (ROI): 2026 Guide

Every dollar you invest in your business should work harder than the last. Return on investment (ROI) measures exactly how hard that money works—tracking the profit generated from each dollar of capital invested. Whether you’re evaluating a marketing campaign, new inventory, or entire business ventures, ROI reveals which investments drive real growth and which drain resources.

This guide breaks down everything you need to calculate, interpret, and improve your business’s ROI. You’ll learn multiple calculation methods for different business scenarios, discover what constitutes a good ROI in today’s market, and get actionable strategies to boost your returns.

What is ROI (return on investment)?

Return on investment (ROI) is a financial metric that measures the profitability of an investment relative to its cost. It shows how much you gained or lost from an investment as a percentage of the initial investment amount. ROI helps businesses measure how efficiently their money is working, showing which efforts drive growth and which ones drain resources. 

For ecommerce businesses, ROI applies to everything from advertising spend and inventory purchases to technology investments and store improvements. A positive ROI means your investment earned more than it cost, while a negative ROI means you spent more than you made. The higher the percentage, the more profitable the investment.

How to calculate ROI

The most straightforward way to calculate ROI is expressing it as a percentage of your initial investment—whether that’s a gain or loss.

Basic ROI formula

Here’s the formula: subtract the “cost of the investment” from the “total gain on the investment,” then divide that result by the “cost of investment.” Let’s say an investor puts $5,000 into a clothing store. At year’s end, they receive $6,000 back. 

The ROI calculation looks like this:

($6,000 – $5,000) / $5,000 = 20% ROI 

This 20% return tells both the investor and store owner exactly how well the investment performed.

ROI calculation example

Consider a boutique investing $10,000 in seasonal inventory. After selling through the collection, the store generates $15,000 in revenue from those products. 

Here’s how to calculate the ROI:

Initial investment: $10,000

Total revenue generated: $15,000

Net profit: $15,000 – $10,000 = $5,000

ROI = ($5,000 / $10,000) × 100 = 50%

This 50% ROI means the boutique earned 50¢ for every dollar invested in inventory—a strong return that justifies the investment.

Net income ROI

Net income ROI shows how much profit your business generates after all expenses, not just the direct costs of an investment. It helps you measure overall efficiency and compare performance across products or time periods. 

The calculation is similar to basic ROI, except you are dividing net income by total investment cost. 

If an investor put $8,000 into your business, and after all expenses including overhead, payroll, and marketing, your net income is $3,000, the formula would be: 

($8,000 / $3,000) x 100 = 37.5% 

Different types of ROI formulas

Different business scenarios call for different ways to measure ROI. Each formula offers different insights into your business performance, helping you see where your investment is working hardest and where there’s room to improve.

Annualized ROI

Annualized ROI adjusts returns to show what you’d earn per year, making it easier to compare investments with different time periods. 

The formula accounts for compound growth over multiple years:

Annualized ROI = [(Ending Value / Beginning Value) ^ (1 / Number of Years)] – 1

For instance, if a three-year investment grows from $10,000 to $16,000:

Annualized ROI = [($16,000 / $10,000)^(1/3)] - 1 = 16.96% per year

This shows the investment delivered nearly 17% annual returns, helping you compare it against other opportunities like one-year investments or market benchmarks.

Marketing ROI

Marketing ROI measures the revenue generated from marketing activities relative to their cost. This metric helps you identify which channels and campaigns deliver the strongest returns. The formula is:

(Revenue from Marketing – Marketing Cost) / Marketing Cost × 100

If you spend $2,000 on a social media campaign that generates $8,000 in sales, your marketing ROI is 300%—meaning you earned $3 for every dollar spent. Track this metric across channels to optimize your ROI marketing budget allocation.

Inventory ROI

Inventory ROI reveals how efficiently your stock investment generates profit. You can calculate it by dividing your gross profit from sold inventory by your average inventory investment:

Inventory ROI = (Gross Profit / Average Inventory Cost) × 100

A clothing retailer with $50,000 in average inventory that earns $75,000 in gross profit sees a 150% inventory ROI. This metric helps you identify slow-moving stock and refine your buying strategy. Your profit and loss statements will give you the data you need to calculate it accurately.

The uses of return on investment

ROI serves different purposes depending on who’s using it, whether that’s investors or business owners. 

For business owners

ROI is a powerful tool for store owners seeking investors, as strong ROI numbers open doors to funding. Demonstrating that your store can provide a 20% ROI, for example, makes the business a compelling investment opportunity. 

On the other hand, low, zero, or negative ROI signals trouble to investors. When returns disappoint, they look elsewhere. If your ROI numbers are low, it’s a signal to examine your operations closely and see what’s going wrong. While ROI is not the same as profit, it’s an indicator of whether the store’s performance is trending up or down over time.

Business owners also use ROI to evaluate operational decisions—from choosing suppliers to launching new product lines. Tracking ROI across different business areas shows you where to focus your resources to maximize growth. Make sure you calculate your net income accurately to ensure precise ROI measurements.

For investors

ROI helps investors compare potential returns across different opportunities. For example, looking at the ROI of a clothing store against a shoe retailer shows where their money creates more value. These comparisons help investors make decisions about which businesses are worthy of their investment.

Investors also use ROI to benchmark performance against stock market expectations. Investors expect a 6.4% market return in 2025, while 10-year expectations average 7.6%. Any business investment should target returns that exceed these benchmarks, as these investments tend to be riskier than traditional market investments.

What is a good ROI?

A “good” ROI depends on your industry, risk tolerance, and investment timeline. Generally, any positive ROI beats a loss, but successful businesses target much higher returns to justify the risk and effort involved.

For context, traditional stock market investments historically deliver 7% to 10% annual returns. Small businesses should aim higher to compensate for increased risk—typically 15% to 30% or more. While inventory returns vary widely, investors might target 50% to 150% depending on turnover rates.

Digital marketing campaigns often achieve 200% to 500% ROI—and sometimes even more. 

“Good ROI” also varies significantly across industries. Data centers delivered 11.2% returns in 2024, while retail ecommerce businesses often strive for ROI of at least 20% on well-managed operations. 

For example, health and wellness brand LifeStraw added a simple checkout donation option called “Give Safe Water” to its Shopify store, allowing customers to its $2 to $5 to support safe drinking water initiatives. This small product addition became their top-selling product, generating more than $50,000 in contributions in just one year—demonstrating how strategic product positioning in ecommerce can deliver substantial returns with minimal investment.

Your ROI goal should be higher than what it costs to fund your business—and better than what you could earn by investing that money somewhere else.

How to improve your business ROI

You can boost ROI by either increasing returns or reducing investment costs—or, ideally, both. Start by examining your current investments to see if anything is underperforming.

Focus on high-margin products and services that bring in the biggest returns for every dollar you invest. Adjust your pricing to improve net profit margins without cutting into sales, and automate repetitive tasks to reduce labor costs while maintaining quality. Small improvements like these add up, increasing your ROI over time.

Test and measure as you go. Start with small experiments before making large investments, and track ROI by channel, product line, and customer segment to identify your most profitable areas. Double down on what works, cut what doesn’t, and perform regular ROI analysis to build data-driven strategies that consistently deliver stronger returns.

ROI is not as simple as it may appear

ROI numbers can be misleading if you don’t factor in timing or certain limitations—which can have a major impact on investment strategies.

Time considerations

Consider this scenario: A 30% ROI from one store looks better than 20% from another. But dig deeper, and you find that 30% might be spread over three years while the 20% comes from just one year. Suddenly, the one-year investment delivering 20% ROI becomes the smarter choice. 

But risk can complicate the picture further. That attractive one-year investment might carry more uncertainty than the three-year option. Some investors prefer the stability of longer-term commitments, even if annual returns are lower. The best ROI depends on both your risk tolerance and investment timeline.

ROI limitations

ROI also doesn’t capture the full story of an investment’s value. It leaves out factors like brand building, customer loyalty, and market positioning that generate long-term value beyond immediate returns. A marketing campaign might show negative ROI initially, but establish brand awareness that drives sales for years.

ROI also assumes you can accurately measure all costs and benefits, which is often impossible with complex investments. Hidden costs like management time, opportunity costs, and risk factors can skew calculations. Smart businesses use ROI alongside other metrics like customer lifetime value, market share growth, and competitive positioning to make fully informed decisions.

Track ROI with Shopify Analytics

Shopify Analytics makes ROI tracking automatic and actionable. Built-in reports show your return on ad spend (ROAS) across channels, product profitability by stock keeping unit (SKU), and customer acquisition costs by source. These real-time insights eliminate guesswork from investment decisions.

Custom reports let you drill deeper into specific ROI metrics that matter to your business. You can track inventory turnover rates, compare supplier performance, and measure the impact of pricing changes on profitability. You can also set up automated alerts when ROI drops below target thresholds so you can react quickly to protect margins.

When your marketing tools connect with Shopify, you can follow every step of a customer’s journey—from the first click to the final purchase. Tracking both ROI and return on assets gives you a fuller view of how efficiently your business turns effort into profit.

ROI isn’t just a financial metric—it’s a feedback loop for smarter decisions. When you track it regularly and act on what you learn, every dollar you invest moves your business closer to sustainable, profitable growth.