What is ROI?: Find out if Your Investments Have Been Efficient by Calculating this Metric
ROI is a financial metric based on the relationship between money earned and money invested in a specific action. It means “Return on Investment”. This return calculation is widely used in marketing to validate investments made.
The only way to correctly choose the investments that a company should make is to understand well what are the strategies that give results and can bring the business closer to its objectives.
But, with so many customer acquisitions and loyalty tactics, how do you know, specifically, what works best for your business?
It seems complicated, doesn’t it? But the answer is to calculate ROI accurately and act accordingly. The great advantage is that, in Digital Marketing, this is completely possible.
Do you want to know more about ROI, how to calculate it, and what it is for? Stay with us, we will explain everything you need to know about this impressive metric!
What is ROI (return on investment)?
The term ROI is the acronym for the English expression “Return on Investiment”. Through this indicator, it is possible to know how much money the company is making (or losing) with each investment made.
This includes everything that is done to obtain future profits, such as marketing actions, sales training, acquisition of administration tools, and new customer retention strategies, among others.
In this way, it is clear not only which investments are worthwhile, but also how to optimize those that are already working, to have a better return.
ROI can be calculated in several areas, such as:
- Content Marketing ROI;
- ROI of email marketing;
- ROI from social media;
- ROI of campaigns in Google AdWords;
- ROI corporate blog;
- ROI of SEO;
- among others.
Why is ROI important to the success of my business?
The subject is very broad and offers an incredible variety of methods and tools for those who want to do business on the Internet. But, many options can confuse even those who already know the subject well.
Apart from that, remember that Digital Marketing actions, although reliable and effective, can offer different results depending on your niche, and target audience, among other details.
Therefore, controlling ROI is essential. Help answer some deep questions about your business, like these:
- What are the biggest sources of profit for the company?
- What are the most effective communication channels?
- Is the performance of the marketing initiatives as expected?
- Has the sales process proven to be efficient?
- Does customer service contribute to customer loyalty or is it falling short?
Of course, it is useless to expect to find detailed information only by looking at a specific period of ROI, but it will give you a good direction on where to look.
Then, using other important metrics and indicators, you can drill down to the points that need improvement.
How to calculate ROI?
The easiest way to calculate ROI is by following this formula:
ROI = [(revenue – costs) / costs] x 100
You can use it comprehensively, to analyze the business as a whole, or specifically, to evaluate a project or area, individually. By working in this way, it is possible to identify errors and problems in any part of the business.
In addition, the final result is in percentage, which makes it easy to compare the ROI of different actions or strategies.
What is classified as “income”?
Revenue is everything the business collects from sales. When calculating ROI for a specific area or campaign, remember to only use the amount raised by the chosen segment.
For example, to calculate the return on investment for an e-commerce platform in your Email Marketing campaigns, the revenue value must represent only the sales of that channel and not that of the store as a whole.
What are “costs”?
The costs are all those expenses necessary to make the investment viable.
In the case of the previous example, of the e-commerce platform, the costs are represented by the amount paid to use the platform, the price of hosting the website, the investments in paid ads, the expenses with Internet, telephone, and everything that be necessary.
How to evaluate the results of your business?
To better explain this metric, let’s look at the virtual store fictitious case mentioned above.
Suppose that the company as a whole received $ 14,000 in sales and that $ 5,000 came in through the online store.
To keep the site up and running, you need to spend $ 1,000, while the physical store needs $ 3,000.
In this case, the ROI of our e-commerce would be:
ROI = [(5,000 – 1,000) / 1,000] x 100
ROI = (4,000 / 1,000) x 100
ROI = 400%
In other words, the return obtained is 400%, that is, for every US $ 1 invested, you will receive the US $ 4.00 in profits.
Meanwhile, the ROI of the physical store would be:
ROI = [(9,000 – 3,000) / 3,000] x 100
ROI = (6,000 / 3,000) x 100
ROI = 200%
It is worth remembering that the result can vary greatly. It all depends on the action taken, the quality of the planning, the execution, among other details.
The important thing is that with the ROI in hand, it is possible to analyze:
- What was done (or was not done) that could have influenced this result?
- Is there a relationship between high-yield investments?
- What do high ROI holdings have that can be replicated on others?
- Are the campaigns performing similarly to my competitors?
- Does your company have better results than the others in the sector?
In the example above, the result was positive, but it can also be negative.
In these cases, this means that the investment caused the company to lose money. Although this is not good news, this information allows the company to investigate the problem and make any necessary changes.
What are the ROI limitations?
Although the above calculation seems to be the solution to all your doubts regarding the investments and marketing actions carried out by your company, keep in mind that there are limitations.
For example, when interpreting it: is a 5% ROI good or bad? It depends! Read on and you will know how to interpret ROI.
ROI does not take into account the duration of the investment
If we talk about an ROI of 5% per day, it is a wonderful result. But if we talk about long-term investment, for example, 1 year, it is no longer such good news.
ROI does not take into account fluctuations in value due to inflation
The ROI calculation also does not take into account the increase (or decrease) of inflation. In other words, a 5% annual yield would be dissolved by rising inflation or other banking problems (taxes, tariffs, etc.).
ROI does not take seasonality into account
Another limitation of this metric is that its result does not take into account seasonality.
If you use ROI to measure investment in the medium or long term, you can get a positive result and think that everything is fine, but that is not true.
Depending on the investment in question, that number may have been influenced by other factors masking negative results for certain periods.
ROI calculation can be manipulated
Finally, when analyzing the results it is very important to understand where the numbers used in the calculation come from.
An entrepreneur can compare the ROI of two products by dividing the gross profit generated by each of them and considering the expenses of the marketing team as a cost.
Meanwhile, the finance team can do the same analysis using completely different numbers, for example, the net profit of each product as income and the total value of all resources used to produce and sell the product as cost.
Because of this, anyone who uses ROI to evaluate an investment must make sure they know the source of the numbers used and that all calculations use the same standard.
5 challenges to Using ROI Correctly
You may already be excited to start analyzing your investments and figuring out where to put your energy into. And this is great!
But before that, it is important to overcome certain challenges that can make it difficult to use ROI in your future strategies.
Here are some tips!
#1. Forget about vanity metrics
ROI is just one of many indicators that we can use to better understand how a business is doing. However, in certain cases, ROI can point to more than well-known metrics.
If that’s the case, what is probably involved in the use of what we call vanity metrics? They are great for making you feel good about the strategies used, but they do little to keep the business strong.
For example, an increase in traffic to your site may indicate that the strategy adopted for that channel is working.
But what matters, in this case, are conversions, such as generated leads, and conquered customers, among others. That data is only possible with careful monitoring of ROI.
After spending so much time, energy, dedication, and a lot of teamwork, plus money, to launch a campaign, it can be difficult to change direction.
But, if the results shown do not contribute to the development of the business, do not hesitate to change the points that were found to be deficient.
Whether it’s making big planning changes or even abandoning once and for all that proposal that seemed like the ideal solution for a particular problem, it is important to adapt quickly.
The ability to understand changing circumstances and react to them with speed is one of the most important characteristics for anyone who wants to use ROI information in the best possible way.
#3. Stay tuned to the market
Nothing is totally permanent in Digital Marketing, so keep an eye on what happens in the market. The strategy that works today may not be so good tomorrow. The reverse is also true.
But what does it mean to pay attention to the market? Observe closely the evolution of the tastes, desires, and needs of your audience.
The technological advances and even what competitors are doing are also factors to consider.
By doing so, you will always continue to test the relevance of current actions and you will take the initiative to decide what strategies will be adopted in the future.
ROI tracking is much more than a numbers game, as it also requires insight and sensitivity on the part of decision-makers to trade off what doesn’t work and improve what is already good.
#4. Don’t hide information from your team
Rather than monitoring the ROI of each campaign and action, it is vital to share objectives and observations with everyone in the company.
Doing so will meet little or no resistance when you need to take a new direction, perhaps affecting the hard work of other professionals.
Hiding why a change is being made gives the wrong impression that the decision was completely arbitrary and meaningless.
On the other hand, when everyone understands the importance of working with ROI in mind, no one will feel so attached to particular efforts, but rather to the end result.
#5. Be patient when evaluating investments
We always talk about how Digital Marketing has evolved over the years and consequently the importance of keeping up with what is working right now.
However, don’t forget that even the most effective actions take some time to deliver the expected results.
So, when calculating your ROI, think about a reasonable time for the investment to start to pay off. Otherwise, you can waste a strategy that would work by making changes in advance.
A good solution to know when to act is to monitor the increase in ROI over the months and compare this progress with the estimated payback period, defined at the beginning of the campaign.
But what happens after all this? Surely you wonder what happens after overcoming these challenges? Read on to learn about some of the benefits ROI brings.
5 advantages of knowing how to work based on ROI
After the effort comes the reward, right? Therefore, there is nothing fairer than seeing the good results of calculating ROI and acting in the right way. Here we will discuss the benefits of using ROI as the centerpiece of business planning!
#1. Cut unnecessary expenses
Analyzing ROI and acting on the data found goes far beyond providing security to make important decisions.
The practical effect of this assessment is what really interests us: by showing which investments are worth keeping, the tactics to be abandoned are also automatically displayed.
In this way, both unnecessary expenses, as well as any investment that does not produce profits, will be eliminated little by little.
Cutting unnecessary expenses helps increase income and, in turn, profits. But let’s not stop there!
Basically, by using the money available in the best possible way – for example by withdrawing it from ineffective methods and applying it to the ones that work – the result can only be one: increased profits.
After all, you will have more resources and time to spend on campaigns that are working, to optimize them over time.
It makes no sense to have astronomical growth for a few months and then revert to a pattern of waste and bad investments, don’t you think? With that in mind, tracking ROI is an ongoing process, it can never be set aside.
Since the end goal is to be consistently profitable, no matter how much time passes, once the habit of doing this calculation is established, you can expect lasting results.
The only thing necessary for this is to maintain the follow-up cycle and quick actions to correct the problems found.
#4.Increased team self-esteem
Who would not like to work in a successful company, in which the projects created work well and the established objectives are always achieved?
Well, this is the kind of environment you’ll help create with ROI in mind. Can you imagine the difference between having a motivated team working at full speed, compared to a team that has doubts about its own possibilities?
#5.Strengthening the culture
It is not an exaggeration to say that monitoring ROI can also have an effect on shaping company culture. Why?
Because evaluating this indicator well and working based on it helps everyone to:
- have an analytical look at work;
- focus on results, not just personal achievements;
- be impartial when making decisions;
- better understand what works for the business.
Without a doubt, these are values that are worth having as part of the organizational culture.
Given this, it is clear that ROI has a profound impact on the health of your company, both in the immediate marketing and sales results and in the ability to remain relevant in the market.
Use this information as a starting point to make good decisions and get more benefits!
Now that you know all about ROI, how about knowing other indicators that are worth following? Learn about the main marketing metrics to evaluate your conversions and the increase in your income.