What is a good return on investment (ROI)? [Updated 2022]By Ankur Pramod
It’s a no-brainer: of course you want the highest return on investment possible for your business. And at first glance the question “what is a good return on investment (ROI)?” might seem like a no-brainer, too. I mean, let’s be honest, it is a silly question, isn’t it? The answer is so obvious! But then it hits you and you really start to think about it… No, seriously. What is a good ROI?
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You might think any investment that leads to investors making a profit is a good ROI. Not losing money is good. Losing money is bad. But then there’s that little questioning voice in your head. Is that really true?
To sum up the article:
- What is a good rate of return on investments? For investors, it’s 7 percent.
- What is a good ROI percentage for agencies? There is no set percentage. Some agencies might be satisfied with a 5-percent ROI, while others might be on the lookout for a higher number like 20 percent for it to be considered good ROI.
The best ROI dilemma: The case of Uber and Cafe Mexicana
How little is too little? How much is too much? What is a good rate of return on investments, and how important is it? Consider a company like Uber, who just reported a record second quarter of revenue is 2022, but lost nearly $2 billion on investments (The New York Times).
Pre-pandemic in 2020, experts were not even sure that Uber would ever even turn a profit—they hadn’t done so since their inception in 2009. They were even wondering what is a good return on investment for Uber, exactly? Investors looking for the best ROI would steer clear, right?
Wrong. According to a CBC news report, in 2019 the ride-hailing company lost about 58 cents each time someone ordered a cab (CBC). Yet, perhaps counterintuitively, Uber has always had absolutely no problem attracting investors to this day.
On the other end of the spectrum, there’s the story of how a marketing agency was able to provide a 4,381% ROI to one of its clients, Cafe Mexicana.
Through white-label advertising campaigns, the restaurant was able to earn nearly $30,000 in revenue from over 300 new customers in a span of just 28 days.
So considering Uber and Cafe Mexicana, which has the highest return on investment?
Before we answer that question, let’s first break down one of the most widely used terms in the business world.
What is a good rate of return on investments?
You start off by wondering: What is a good return on investment? But you have to get down to the meaning first. The phrase “return on investment,” often shortened to ROI, has achieved buzzword status. Driving the best ROI is a goal often thrown around by companies, but as we’ve seen, the meaning behind buzz is not always as clear cut as it may seem.
In the pure and traditional sense of the term, when asking, “What is good ROI percentage?” people really wanted to know, “what is a good rate of return on investments?” In this case, they were talking about a success metric for literal investors only. In this case, good ROI means exactly what it sounds like. In short, it’s a calculation of the return that investors receive on the investments they make.
But what is a good ROI percentage outside of the realm of investors? It’s definitely grown to be more widely applicable.
Most businesses around the globe now use good ROI as an integral metric to analyze the efficiency of an investment of money (or other resources) over time to decipher whether the strategy behind the decision was productive.
Using these findings, businesses can make a decision on whether to follow the same strategy in the future and compare different options to determine the one that will yield the highest return on investment.
What is a good ROI percentage?
Typically, if we’re talking investment in stocks, then we can answer “what is a good rate of return on investments?” by pointing to experts who dictate that a 7-percent return on investment (Forbes) is considered good ROI.
But what is a good return on investment for your business?
In terms of putting a numerical value on it, good ROI can be calculated by taking the difference between the current value of the investment and the cost of the investment, and then dividing that value by the cost of the investment.
Calculating what is a good rate of return on investments can be done in different ways, with different formulas.
But at the end of the day, the best ROI will be the highest number at the end of your calculations.
Is the expected return from an investment supposed to be monetary?
Is the highest return on investment supposed to be monetary?
When it comes to the highest return on investment, this is where it gets tricky. Gary Vaynerchuk, the CEO of VaynerMedia and chairman of VaynerX—a media and communications company—might have the answer to that question. Let’s think back to the question of what is a good return on investment in the case of Uber.
ROI isn’t about the tool, it’s about investing the time and effort to use it correctly. The 'I', the investment, isn’t monetary, it’s not about throwing money at something. It’s about investing the hustle into becoming the best. It’s about execution. If you want to make money doing something, you need to be really good at that something in order to see the returns you’re looking for.
Based on his logic, the investors investing in Uber seem to be making an intelligent choice, even if they’re not earning profits now (Gary Vaynerchuk). They’re taking a chance by hoping that the company one day will monopolize the market and therefore start delivering good ROI.
However, since good ROI depends a lot on the type of industry a business operates in, the answer to “what is a good rate of return on investments” for a company operating in the taxi and limousine industry might differ significantly from that of a marketing agency servicing its clients.
What is a good return on investment for an agency?
Truth be told, the best ROI for an agency would be to ensure that their clients make a profit. That’s it. Apart from that, there is no one size fits all correct answer.
What is a good ROI percentage? Some agencies might be satisfied with a 5-percent ROI, while others might be on the lookout for a higher number like 20 percent for it to be considered good ROI. Either way, it pays to think profitably as an agency owner.
Looking at our earlier example of Cafe Mexicana, for the agency involved there to facilitate an ROI of 4,381% is staggering considering that the average ROI for a full-service restaurant is around 6% (Forbes).
In reality, there is no set value or percentage that agencies can or should guarantee their clients looking for the highest return on investment.
However, in the next two sections we can look at good ROI at a channel-specific level to gain some more nuanced insights, as well as list important factors for agencies to consider before estimating ROI for clients.
ROI: digital marketing
What is a good return on investment for a digital marketing agency’s specific channels?
First of all, when it comes to digital marketing, good ROI is an indicator that your marketing efforts are paying off—literally. Savvy agency owners can set themselves up to scale by keeping ROI in mind at all times.
An effective digital marketing strategy will require a tangible investment from your agency (time, resources, and cash), so you want your results to be tangible too.
If you’re not budgeting properly, you risk operating at a loss and hurting your bottom line rather than enjoying the profits that come with achieving the highest return on investment for your efforts.
Bottom line: when it comes to your marketing initiatives, you want to keep track over time to ensure you’re pulling in more than you’re spending.
Here are a few of the “C” metrics you should keep on your radar to ensure you’re trying to determine what is a good return on investment and trying to achieve the best ROI for your digital marketing campaigns:
- Cost-per-lead (CPL). How cost-effective your online lead generation strategy is for your sales team?
- Cost-per-acquisition (CPA). How much does it cost to get a single lead through your sales funnel to the point of conversion?
- Customer lifetime value (CLV). How much have you earned from your customers over the duration of your relationship?
- Conversion rate. How many visitors (leads) to your website take a desired action and convert (prospects).
- Close rate. How efficiently do sales teams close sales, give the number of leads and prospects in the pipeline?
ROI for SEO
Investing resources in refining search engine optimization (SEO) can yield the best ROI when it comes to ranking high on Google search engine results page (SERP) and attracting organic search traffic to your website.
But is it worth it?
Many businesses see SEO as a big undertaking because it requires a lot of research, as the algorithms that power search engines are always changing and updating. Good ROI means keeping pace with the latest SEO strategies and adapting as needed. It also helps to offer agency reporting to show proof and performance to clients.
But SEO is an investment in exponential growth. Like the Uber investors, you need to be patient. But it will pay off. Just keep in mind.
Consider that 91.5 percent of all traffic is generated through clicks on websites that do well in SERP ranking and make it to the first page of Google (Search Engine Journal).
The highest traffic means more opportunities for the highest return on investment.
ROI for PPC
Another method for achieving the best ROI for your digital marketing campaigns is to use pay-per-click (PPC) advertising in conjunction with SEO.
With PPC, advertisers only pay only when a lead clicks on the ad. So what is a good return on investment in this scenario?
The average profit for converting a customer, minus the fixed cost of the click. Generally, if the number you’re left with is in the green, you have good ROI on your hands.
PPC also has added benefits such as allowing businesses to target specific audiences and ideal customer profiles through the use of keywords. This is where SEO comes in again!
PPC ads can manifest as paid social advertising on platforms such as:
On the other hand, good ROI can also be achieved with paid search advertising on Google, Bing, Yahoo, and other search engines. Search engines will place ads in primetime spots on SERPs to drive extra traffic, targeted through the aforementioned use of keywords.
Engaging a provider for PPC solutions can aid greatly in creating high value when running your campaigns to generate the best ROI for your agency.
What to consider when it comes to achieving good ROI
1. What is a good ROI percentage? It depends on taxes
What is a good rate of return on investments when taxes are involved? The first thing is to remember that they’re involved in the first place.
Picture this. It’s Black Friday and you’ve been standing in line at the electronic store for two hours waiting for it to open.
You know that the new LED 4K smart television is going to be on sale. It’s everything you’ve ever dreamt about. It has ultra HD display, Wi-Fi connectivity, and those pristine curved edges that make your heart skip a beat.
The retail price is close to $800, but the special sale price of $200 is what inspired you to wake up at 3am, drive for 20 minutes, and hop in line. Talk about getting the best ROI! You even have the exact cash ready so that you don’t waste time and can get away from the chaos as soon as possible.
The bell rings and the door finally opens. You know exactly where to go and what to do. You quickly pick up one of the televisions and place it in your cart. As you head towards the cashier, you overhear people upset by how all the televisions have been claimed in record time, given the good ROI offered by the sale. A smile comes across your face and you feel proud.
You check your top pocket and pat those two crisp $100 bills. Leaving your cards behind was a wise move, since you would have less things to worry about.
“That will be $222. Will you be paying by cash or card?” asks the cashier. Wait a minute, what just happened? Your bubble bursts and you realize that you forgot to incorporate taxes. Ugh!
Don’t you hate it when you forget to take taxes into consideration and end up getting the wind taken out of your sails? Unfortunately, that’s what many agencies forget as well when they are calculating what seems to be the highest return on investment.
Not incorporating taxes into your ROI equations can have a drastic impact on seemingly good ROI, leading to businesses losing out on profits.
As the old saying goes, nothing is certain in life except death and taxes. While determining what is a good return on investment and while estimating ROI, it is imperative that agencies always incorporate the taxes that they will have to pay on the profits they make.
2. Agencies with the highest return on investment keep inflation in mind
The concept of inflation talks about real returns versus nominal returns. It states that the value of a dollar is worth more today than what it will be as time progresses—which can greatly affect good ROI projections.
If we take the example mentioned above, while $800 would surely get that LED television from the store straight into your living room today, five years from now $800 couldn’t buy you a television of the same caliber and quality because the prices would be inflated.
So what is a good ROI percentage considering the reality of inflation?
While making the best ROI estimates, agencies must ensure that they incorporate at least 2-3 percent inflation (or the appropriate standard industry average) each year into their calculations.
Taking inspiration from Benjamin Franklin who said, “I'd rather be a pessimist because then I can only be pleasantly surprised” (Goodreads), agencies can also choose to use a higher than normal inflation percentage while making their financial projections for the future.
Such a conservative approach might motivate them to target the highest return on investment, since what seems to be the best ROI today might not be so great in the future when businesses finally receive their payout.
3. If you want to determine what is a good return on investment in the agency world, understand that time is money
While time might be the perfect remedy to heal a broken heart, when it comes to investments, time can be your worst enemy. Let’s take a look at an example to understand this factor better.
Imagine your agency is given an option to double the value of your investment and thereby generate a ROI of 100 percent. Will you take it? Of course you will. Only a fool would pass up such an opportunity.
Now, what if we tell you that you would only be able to double your value after a span of five years? Does that change your answer? Maybe. But, what if it would take you 100 years to get that 100-percent ROI? Does the offer still sound exciting? Probably not.
Often, determining what is a good return on investment for your agency depends on context, and time is a huge factor—not even taking into account what we learned about inflation in the previous point.
Time is of the utmost essence when it comes to achieving the highest return on investment. What agencies must keep in mind is that the longer they plan to invest money in a project, the higher their return expectations should be.
Another aspect of time to consider is the investment of resources, which can make or break good ROI.
If your team is spending countless precious hours on digital marketing campaigns that are yielding little to no results and hurting your bottom line, your agency ecosystem is inefficient at best, and completely broken at worst. And no one should be investing in a broken system.
4. What is a good ROI percentage? It’s about knowing your opportunity costs
Have you ever found yourself in one of those tense situations where you’re battling your instincts to make a decision? How about at the grocery store when you have to choose a cashier line?
Similarly, it can be very challenging for an agency when it comes to making a decision about an investment. They might ask the wider team, “what is a good return on investment?” and then be faced with several competing answers.
Would the business be better off with investment A or investment B? Perhaps the highest return on investment can be yielded from investment C? Investment D promises good returns, but investment E means a quicker payout.
One can weigh the pros and cons and look at the historical data, but in the end, what is a good rate of return on investments? That depends on the cost of the opportunity. What an agency is willing to sacrifice, as opposed to what it would gain elsewhere, is one of the most crucial factors when making these decisions and calculating good ROI.
Just like at the grocery when you dive deep into your subconscious and start wondering whether the line you joined will suddenly start moving faster once you leave it, agencies too need to consider profitability and what they would do with the money if they decide not to make a specific investment.
The final word on good ROI
Neal Polachek, former CEO of The Kelsey Group and founder of ThinkLikeAnApp—an initiative that empowers teams to compete in the market—made an interesting point when he talked about what is a good rate of return on investments and how to achieve the best ROI on the Conquer Local podcast presented by Vendasta.
I’m sure there’s more data around ROI. I also think that the business owner, you know, wants the right kinds of customers. I mean, ROI is a calculation, right? You spend this, you get this back. The question is, what is this that you get back? Are those good customers? Are those customers who leave satisfied, that say good things about you to their neighbors that write good reviews about you? I mean, ROI, it has to be done. But I think the story is bigger than ROI. It’s around, you know, can you deliver, once you get that customer, can you deliver a compelling experience?
So what is a good return on investment?
From Polachek’s perspective, it doesn’t matter whether your investment strategies bring in 10 people or 10,000 people to view your product or use your service. What matters for good ROI is the number of those people who actually become quality users and lead others on that path as well.
Having one quality customer is better than having 20 people who convert and do nothing. Instead, for the best ROI, invest in creating quality client experiences, building your brand awareness, improving findability, and using a reputation management software. In our opinion, if you ask "What is a good return on investment" the answer sometimes comes down to quality customers over monetary rewards.
The question “what is a good ROI percentage” can therefore be a bit misguided. When it comes to good ROI, what matters is not how much you get back, but what you get back. Apart from making a profit on your investment, there can be no dollar amount or percentage value that can justify the ROI for an agency.
What is certain, however, is that agencies must always strive to increase their ROI. They must think about the factors that affect the return on investment, and reduce their costs as much as possible to increase the profitability of their business.
Original post by Ankur Pramod, updated in 2022 by Domenica Martinello