Every dollar counts in the beauty and wellness world. And understanding return on investment (ROI) tells you how to make your money work harder. 

ROI is a key financial stat all self-care entrepreneurs should know. It tells you whether your investments are worthwhile, offering the information you need to set realistic goals and move your business forward, whether you’re expanding a service menu or opening additional locations. 

Here’s a guide to what small business ROI is and why it's essential for your beauty or wellness biz. We'll also walk through its pros and cons and how to calculate it confidently.

What Is ROI and Why Is It Key for Self-Care Businesses? 

ROI is an important financial performance measure that tells you how much money you’re gaining from an investment compared to what you put in – in other words, how much bang you get from your buck. It evaluates the efficiency of an investment, whether it's a new piece of equipment, a marketing campaign for your salon opening, or additional staff members. These data-driven insights help you make better decisions to increase income and scale operations.

For example, if you're an esthetics business owner, you might invest in an expensive state-of-the-art facial machine. Calculating its ROI shows whether the machine is ramping up your income, collecting dust, or even costing you money. This analysis tells you if the machine is worth keeping.

But what is a good ROI in business? Generally, it’s when you’re getting more money back than you put in. This logic applies to the self-care company as a whole as well as smaller individual investments, like equipment and marketing. 

To accurately calculate ROI, you have to track expenses closely (which is an important tip for salon owners regardless). You need to know how much money is coming into and leaving your business, so record what you spend and on what in a spreadsheet or with tracking software. If you don't monitor your spending, costs can spiral out of control, and you won’t have the data you need to see how you’re doing. 

Not sure where to start? GlossGenius makes managing your finances, including taxes, simple. Our online booking platform seamlessly integrates Expense Tracking, Payroll, and Point of Sale (POS) features to help you stay on top of your ROI (and then some).  

Sign up for a 14-day free trial with GlossGenius! 

How To Calculate ROI in Business: ROI Formula Example 

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Calculating ROI helps you see if your financial choices generate worthwhile income. Here's how to do it in four simple steps: 

1. Determine Investment Cost 

Identify the costs associated with the investment, including the initial purchase cost and any related ongoing expenses. 

If you launch hair removal services and purchase a high-tech laser hair removal device, the upfront cost might be $2,500. Consider the cost of training staff to use it, which could be around $500, plus marketing to promote this new service, which we’ll say is another $800. In this case, the total cost of your investment is $2,500 + $500 + $800 = $3,800. 

Pay attention to ongoing expenses, such as maintenance for the machine or new parts. Without them, you might get an inaccurate ROI calculation, which can make you think an investment is more profitable than it actually is. 

2. Calculate Net Profit 

Determine the net profit from the investment – the actual profit your business makes after meeting all expenses. First, track how much you've explicitly earned from the investment. For example, if you purchased a new laser hair removal device, add up all the sales generated from laser hair removal services that used the machine throughout the year. Let’s say the machine led to $10,000 in income. That's your investment's overall revenue. 

Then, take the $3,800 you calculated before and subtract other related costs, like the additional electricity the device uses and any extra supplies needed for the service, like aftercare products. Let’s say they add up to $450 over the year. 

Subtract the total investment cost ($3,800 + $450 = $4,250) from your revenue of $10,000 to get a net profit of $5,750. 

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3. Divide Net Profit by Investment Cost 

Divide your net profit ($5,750) by the total investment cost ($4,250). The answer – $1.35 – is how much profit you earn for every dollar spent on the investment. The higher this number is, the better your investment's profitability. If the number is in the negative, you know it’s performing poorly.

4. Calculate ROI Percentage 

Convert the figure you calculated above into a percentage by multiplying it by 100. For example, 1.35 x 100 = 135%. An ROI of above 100% means your investment has more than paid off – nice work!  

Let's put this ROI example into perspective with a comparison. Imagine you also want to calculate the ROI of a marketing campaign that costs $3,000 and brings in an additional $4,000 in revenue. Here are the calculations: 

Net profit = Revenue - investment cost = $4,000 - $3,000 = $1,000

ROI = Net profit / investment cost x 100 = 33.33% 

A laser hair removal device that generates a 135% ROI is a better investment than the marketing campaign. While 33% is still a great ROI, it isn’t quite as high. 

The good news is that you don’t have to calculate ROI yourself. GlossGenius created a free ROI calculator starter spreadsheet to understand how your profits can grow with our salon and spa software. 

Sign up for a 14-day free trial with GlossGenius! 

Pros and Cons of Calculating ROI 

Just like any tool, calculating ROI has perks and pitfalls. Here's the inside scoop on the pros and cons.

Pros of Using ROI

Spotlight Your Best Investments

Calculating ROI teaches you which parts of the business are pulling their weight (and which aren't). If you've recently invested in a sleek new pedicure chair or social media ads to promote a sale on a line of retail products, calculating the ROI for each tells you which is more beneficial. This means you can do more of what works and less of what doesn't, using legitimate data to guide you. 

Measure Performance 

Measuring profitability over time tells you if your financial decisions pay off. You get the insights you need to switch gears and try something else. For example, if you add a new skincare service to your menu, tracking this metric shows whether it's a hit with clients. A dud? Cut your losses and move on. A win? Keep it up and emulate that with similar services.

Calculate Easily

You don't need an accounting degree to calculate returns (thank goodness). Just bring your initial investment cost, net profit, a calculator, and the formulas above. It's quick and easy and gives you clear, actionable insights that can better your business. 

Cons of Using ROI

Focus on the Short-Term 

ROI is great for quick wins but can miss the mark if you're looking long-term. A rebranding campaign might not seem profitable immediately but can pay off over time by building your reputation – and the better your reputation, the more clients walk through your doors. You might miss out if you're only looking at ROI and not the big picture. 

This is another place where ROI estimates can come in handy. If after a year, you find your estimates on the laser hair removal were wrong, you can use that data to reevaluate or adjust prices for future offerings. 

Difficult To Calculate for Intangible Items

You can't always measure what makes your business unique. Things like a cozy, welcoming vibe in your lobby or an exceptionally smooth checkout experience are hard to quantify but essential for happy customers. While these factors are critical for business growth, a metric like ROI can’t capture them. 

Don’t See the Whole Story

ROI gives you a snapshot of an investment's performance, but it doesn't account for time. If two investments have the same ROI, but one took a year to achieve while the other took two years, you can’t consider them equally profitable. The one that took less time is the better investment because that effort is just as valuable as the money you put in. Sometimes, you have to dig deeper than ROI before deciding if something is worthwhile. 

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Maximize Your ROI With GlossGenius 

Business calculations aren't just about crunching numbers – they help you measure the true impact of your beauty and wellness investments. 

If you want to maximize your rate of return, don't sleep on GlossGenius' all-in-one platform designed specifically for beauty and wellness businesses. In addition to Booking, Point of Sale, and Marketing, our platform helps you keep track of your Finances, secure the money you need with beauty salon loans, and generate detailed Reports & Analytics.

Ready to take your self-care biz above and beyond? Start your free 14-day trial or download our free Business Loans 101 workbook today.