Differences between ROI and IRR

[subornaakter20]

The internal rate of return or IRR is another metric very close to ROI. Again, although it is a close indicator, it measures a variant of the investment.

The main difference is that, while ROI tells us about the return on investment compared to profits already made (i.e. based on real data), IRR is an estimate of expected profitability compared to a hypothetical investment.

The IRR is an estimate and represents the discount fronk oil email list rate that makes the net present value (NPV) of the investment's future cash flows equal to zero. It is used to compare the profitability of one investment vs. another or to determine whether an investment meets the minimum profitability.

It is very important for those who invest capital in businesses and want to get an estimate of ROI.

The importance of ROI in your business
We devote so much space to ROI because it is key to justifying marketing investments. By measuring the financial gains or losses of business management, ROI objectively shows you financial performance and allows you to make decisions to maximize your company's profitability.

In difficult times, some companies reduce their communication budgets, but this is a dangerous measure, since promotion is a fundamental investment to generate income, not an expense.

By understanding ROI and focusing on the importance of campaigns in generating sales, you can dispel the idea that they are unnecessary expenses. For example, ROI allows you to compare investments to choose those that offer the highest return on your investment.

How to Calculate ROI?
Learn how to calculate ROI

Calculating ROI is essential to assess the performance of an investment and determine its efficiency. To do so, you must consider specific elements of each digital strategy.

We explain it to you below.

Formula to calculate ROI
ROI is calculated using a simple formula that takes into account the investment made and the profit obtained. Its formula is as follows:

ROI = (profit obtained – investment) / investment

You must subtract the cost of the investment from the profit obtained or expected. Then, divide that result by the cost of the investment. The resulting number is the ROI. Keep in mind that it can be a positive or negative number. If the ROI result is positive, total revenue exceeds total costs; that is, the investment made produced profits or favorable results. But if the figure obtained is negative, it means that there were more expenses than income and that there are financial losses.


However, factors of various kinds must be evaluated. For example, it is important to bear in mind that the profit obtained may include different components, such as generated income, cost savings or any other type of gain.

In addition, the investment must consider all direct and indirect costs associated with the specific strategy or action.

This metric will help you optimize your strategies for managing your business: if its value meets or exceeds your expectations, excellent: you can reinforce your actions. If, on the other hand, your ROI leaves much to be desired, it gives you a basis on which to compare the result of your next performance.

Example of How to Calculate ROI
Now that we know what the formula for calculating ROI is, we can look at an example of how to put it into practice. Imagine that you have made an investment of $1,000 and made a profit of $3,000. According to the formula, your ROI calculation is: