ROI is a key financial metric that helps you evaluate the effectiveness and profitability of your marketing and advertising efforts. It tells you how much money you are making or losing from your investment in promoting your business. As a marketer, you need to know how to calculate and optimise your ROI to get the most out of your budget.
In this article, we will explain everything you need to know about ROI, including what it is, why it matters, how to measure it, what factors influence it and how it differs from other metrics such as ROMI and ROAS. Plus, we will give you some valuable tips on how to boost your ROI and increase your sales.
ROI: What Does it Mean?
ROI (return on investment) is a financial indicator that shows how much profit you make from your investment. It tells you how much money you earn for every dollar you spend. To calculate ROI, you need to know two financial figures:
Costs. This is the amount of money you invest in your business. For example, if you are an online marketer, your costs are the total of all the online advertising campaigns you run. You choose a specific time period, such as a month, and add up how much money you spend to promote your product.
Revenue. This is the amount of money you earn during the same time period as your costs.
Using these two figures, you can calculate ROI using this formula:
( (Revenue – Costs) / Costs) x 100%
For instance, let’s say you have an online shop of handmade jewellery. In January, you spent $160 on social media advertising and Google Ads. And you sold $400 more products than you would normally sell without advertising. You can calculate the ROI of your marketing campaign using the formula:
( (400 – 160) / 160) x 100% = 150%
This means that for every dollar you spent on advertising, you earned $1.50 in return.
ROI, ROMI and ROAS: Basics and Distinctions
ROI is a crucial metric that is linked to two other metrics – ROMI and ROAS. The main difference between them is what costs they consider in their calculations.
ROI takes into account all the investments in a business, from renting a warehouse to buying stationery for employees. If we’re talking about an online business, ROI includes, for example, the money you pay for a domain name, advertising, employees, etc. It shows the overall profitability of the business.
ROMI is a measure of the return on marketing investment. In other words, when calculating ROMI, you only factor in the money you spent on product promotion: contextual and media advertising, SEO-promotion, email newsletters, etc. This parameter helps you evaluate the effectiveness of different promotion channels to optimise your marketing strategy.
ROAS – Return on Advertising Spend. ROAS differs from ROMI in that it only counts the budget spent on specific advertising campaigns, while ROMI covers the entire marketing budget, including payment for the work of the department’s employees.
Why You Need to Measure ROI
Return on investment is an essential metric for businesses:
ROI is a universal indicator. It can be used to evaluate and compare any form of investment, such as stocks, real estate, buying new equipment for the office, etc. For example, before expanding the product range of the shop, experts assess the profitability of such an investment (taking into account the cost of goods, logistics, wages of employees).
It helps to make informed decisions that benefit the business. If a product or service has a low ROI, the company can identify the reasons for such performance and optimise the work of departments. In advertising activities, this value helps to understand how effective campaigns are and whether it is worth investing resources in promotion.
It allows you to measure personal investments. For example, you want to buy new appliances for the flat you rent out. You can calculate the return on investment, considering the cost of the appliances and the potential opportunity to increase the rent.
Important: There are cases where the financial metric should be used along with other methods of analysing return on investment. This is necessary, for instance, when the company does not pursue financial gain (animal shelters, charity events, etc.).
ROI: How to Calculate Your Profit from Any Investment
There are different ways to calculate ROI, but the simplest one is as follows:
( (Revenue – Expenses) / Expenses) x 100%
Suppose you bought 100 shares of company XX at $8 per share. Your initial investment was $800. The share price increased to $10 and you sold your entire stock for $1,000. Your profit is $200. To find your ROI, you need to divide your profit by your initial investment and multiply by 100%. In this case, your ROI is:
( ($1,000 – $800) / $800) x 100% = 25%
Note: ROI below 100% usually means that you have lost money. However, this depends on the industry and the context. For example, 25% for building a residential skyscraper is considered low, while selling 100 shares with that return is considered to be good ROI.
ROMI: How to Evaluate Your Marketing Performance
( (Revenue – Marketing Expenses) / Marketing Expenses) x 100%
A restaurant ran a Google Ads campaign a week before Valentine’s Day. The campaign cost $200 plus a freelance marketer’s fee of $150. The restaurant’s revenue for that week was $1,350. The ROMI of the restaurant for that week is:
( ($1,350 – $350) / $350) x 100% = 285%
Calculating the total ROMI is not always accurate. This is because not all the revenue generated by a company is directly related to the marketing activities. For example, some customers might have booked tables at the restaurant for Valentine’s Day without seeing the Google Ads.
ROAS: How to Measure Your Advertising Effectiveness
Campaign Revenue / Advertising Costs x 100%
An online pet products shop ran social media ads to attract new customers. The ads ran for two months and cost the business $400. During this time, the shop made a net profit of $1,067. The ROAS of the shop for these two months is:
($1,067 / $400) x 100% = 267%
Another example. You sell handmade ceramic dishes and decided to run a targeted ad for the plates on Instagram. In one month, you spent $67 on the promotion and earned $53. Your ROAS is:
($53 / $67) x 100% = 80%
This means that you spent more money on advertising than you earned from sales.
Tools or Manual Calculation: Which One is Better for Finding Out Your ROI?
There are different ways to calculate ROI, depending on the type of investment and the data available. You can use online tools or calculators to find out your ROI quickly and easily or you can do it manually in a simple Excel spreadsheet. Let’s see how these methods work.
Calculator.net is a simple yet powerful tool that lets you measure the profitability and efficiency of any project or investment. Whether you want to invest in a new business, product or market, you can use this tool to estimate how much money you will make or lose from your investment.
All you need to do is enter the initial and final values of your investment, as well as the start and end dates (or the duration). The tool will instantly calculate the net profit, the ROI ratio and the annualised ROI ratio for your investment.
You can also use this tool to compare different scenarios and see which one has the best ROI. For example, you can compare investing in stocks vs. bonds, or renting vs. buying a property. With this tool, you can make informed and smart decisions about your investments.
Excel spreadsheet is a versatile solution that allows you to enter any amount of data and see how it affects your results. The advantage of using a spreadsheet is that you can get a clear picture of what makes up your figure.
Unlike with online calculators or tools, you don’t have to rely on a single number. You can create a table with different columns, such as “Revenue”, “Advertising Cost”, “Logistics Costs”, and so on. And you can easily spot that your email newsletter costs you $20. This table makes ROI calculations transparent and easy to verify.
There is no one right way to calculate ROI. You can use tools or manual calculation, depending on your preference and convenience – whatever works for you, as long as you get accurate and reliable results. The important thing is to understand the concept of ROI and how it can help you make better investment decisions.
What is a Good ROI and How to Achieve it
As you already know, Return on Investment is a ratio that shows how much revenue you generate from your advertising costs. The higher the ROI, the more profitable your ads are.
For example, if you sell children’s toys on Instagram and spend $207 on ads and earn $569 in revenue, your ROI would be:
ROI = ( ($569 – $207) / $207) x 100% = 175%
This means that you earn $1.75 for every dollar you spend on ads.
A good ROI depends on various factors, such as your industry, product and market. However, a common benchmark is that your ROI should be above 100%. If it is below 100%, you are spending more than you are earning from your ads. You should either stop using that channel or change your approach (e.g. improve your ad copy, images, videos, etc.). If your ROI is exactly 100%, you are not making any profit or loss from your ads. You should try to optimise your campaigns to increase your ROI.
For instance, if you sell products on Instagram, a reasonable ROI would be around 150%. This means that you are making a decent profit from your ads. If your ROI is above 200%, you are doing very well. You may want to invest more in your ads since they are bringing you a lot of income.
How to Account for the Complexities of ROI Calculation
ROI is not always straightforward to calculate and interpret. There are some nuances that you need to consider:
External factors. Your ROI may be affected by things that are not related to your marketing, such as product quality, pricing, customer service, etc. For example, you may lose customers due to poor delivery or faulty products, even if your ads are effective. This will lower your ROI and distort your marketing performance.
Attribution challenges. ROI does not show you which specific channel or campaign brought you the most profit. If you use multiple marketing channels, such as social media, banners and email newsletters, you may not be able to track where your customers came from. You will only see the overall result of your marketing mix.
Time lag effects. Your ROI may change over time as customers react to your ads at different speeds. Some customers may buy right away after seeing your ads, while others may take longer to decide. For example, you may run a promotion for a new smartphone model and get some immediate sales. However, some customers may click on your ads but wait for a few months before buying the phone. This means that your ads have an impact on your ROI even after they stop running.
These variations make ROI calculation more complicated and require careful analysis. You should keep in mind these factors when evaluating the effectiveness of your marketing campaigns. By doing so, you can optimise your marketing strategy and increase your sales and growth.
Challenges of Calculating ROI
Time factor. ROI does not consider how long it takes to get your returns. For example, suppose you invest $1,000 in stock XX and sell it after 5 years for $5,000. You also invest $1,000 in stock XY and sell it 2 years later for $5,000. In both cases, your ROI is 400%. However, XY gives you the same return 3 years faster than XX.
Different formulas. ROI can be calculated in different ways depending on the context and purpose. For example, an investor may use one formula to measure the ROI of a project, while a company may use another formula to measure the ROI of a department. This can lead to different results and potential conflicts during negotiations.
Dynamic nature. ROI is not a fixed indicator, but a snapshot of a moment in time. It can change constantly depending on the market conditions and the performance of your investments. You need to choose the frequency at which you will monitor your ROI. This will help you track the profitability of your investments and make timely adjustments.
How to Boost Your ROI with Effective Marketing Strategies
To increase your ROI, you need to optimise your costs and maximise your revenue. One way to do this is to avoid common mistakes when launching an advertising campaign, such as targeting the wrong audience, using vague messages or ignoring feedback.
Here are some other tips to ensure a high ROI for your marketing efforts:
Match your landing page to your ad text. If your ad promises something specific, such as “MacBook Seattle”, make sure your landing page delivers on that promise. Don’t show the user a page with irrelevant products, such as refrigerators or they will quickly leave the page. You will waste money on the click, but not get the sale.
Measure the ROI of each channel, not just the campaign as a whole. To understand which advertising sources bring more customers, use web analytics tools, such as Google Analytics.
Experiment with different channels. Don’t put all your eggs in one basket. Divide your advertising budget into several channels and see what profit they bring. Be sure to track each channel separately to find unprofitable ones and disable them if necessary.
Test your ads. Don’t invest your entire ad budget on one social media campaign. Create several ads that differ from each other in text and images. Allocate a test budget and monitor which ads generate more revenue and switch off the ones that don’t.
Consider intangible benefits. Sometimes, investments may not have an immediate impact on your ROI, but they may have long-term benefits. For example, an online shop may invest money in developing the website so that it can attract more visitors. The ROI may remain at the same level for some time, but that doesn’t mean the investment was unsuccessful.
Conclusion
ROI (Return on Investment) is the ultimate measure of your investment success. It shows how much profit you make from your business compared to your expenses. If you want to check whether your business is making money or losing money, ROI is the simplest way to find out.
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