What is ROI and how do you measure it?

What is ROI and how do you measure it?

One of the most important metrics for entrepreneurs, ROI points out the strategies that achieve the best results. Learn how to accurately measure yours!

To improve the performance of your business at a steady pace, you need to differentiate the strategies that are working out from those which do not achieve the expected results. ROI (Return on Investment), is one of the metrics that should be taken into consideration in this analysis, since it reflects the financial return you achieved with each action that was implemented, including your marketing campaigns.

Are you unsure about your investment? Discover what ROI is and understand why you should monitor this metric closely!

Definition of ROI

ROI (Return on Investment) is a metric that expresses the money invested in a business and the amount received in return, frequently used to assess if an investment is worth from a financial point of view.

How to calculate the ROI

To calculate the ROI you subtract the total amount of investment from the net income, and you divide the result by the investment once again, as shown in the formula below:

(Net income – Investment)

_________________________________________

Investment

As ROI is expressed as a percentage, you multiply the result by 100.

Imagine you have an online course on carpentry, and the amount of money you spent in the production of lessons and the promotion of your course added up to $1,500.

Then, you start selling your course for $25 each, and you manage to sell 140 units, reaching the amount of $3,500.

Your typical reaction will be to become ecstatic, after all, you doubled the amount you invested. But it is important to analyze if this profit margin is interesting in the long run, and if it is worth quitting your day job to make a living out of your own business.

If we apply the formula, what you get is this:

3,500 – 1,500

___________        X 100  =  133%

  1,500

Then your ROI was 133%! This is an excellent number for someone who’s starting out!

But let’s add other variables to this same situation, so that we reach a better understanding of the numbers for your business.

Consider you will only make two launches per year and the number of people looking for your course decreases in the next few months. In this scenario, is your investment still viable?

It is probable that you will have to invest the money you got from the sales in more promotion for your product, to ensure it is constantly bought.

And during this period you would have to maintain some money for other expenses in your business, or even personal expenses, right?

If you have a solid business plan for your business, in a short period of time, your sales will cover everything you have invested and there will be some capital left to improve your product.

That’s why our tip is: plan your actions ahead and monitor your metrics to make sure you are achieving the expected results.

Understanding the components of ROI

ROI is essentially used to point out the profitability of a business, by showing the relationship between the amount invested and the profit margin achieved in each sale, as explained in the previous topic.

But it can also be applied to calculate and understand the return on each separate investment you make, such as investment in marketing, for example.

And right now you might be wondering: “But if I already know the total profit from my investment, why would I need to identify the amount achieved separately?”

The answer to this question is simple: to optimize your actions and achieve results that are even more expressive!

In the case of marketing, when you know the ROI for your campaigns, you can identify which one performs better.

With these results on your hands, you can:

  • Halt the campaign with the worst performance;
  • Change elements such as Call-to-Action, copy, and images, and see which version achieves better results (always remembering to test one element at a time, to isolate a significant variable);
  • Invest more money on the campaigns with a higher conversion rate.

Besides campaigns, there are other marketing channels that should be monitored closely in order to find out if your efforts are achieving results, such as email marketing, social media, blogs, customer success team, etc.

ROI and marketing campaigns

To calculate the ROI from marketing you should break down the income in three different manners:

  • Income generated by product sales;
  • Income generated by sales made through your campaign;
  • Profit, which is the difference between the income minus the costs to create your campaign.

A simple formula would be:

Income – marketing investment

________________________

Marketing investment

Marketing investment is the total amount spent to air the campaign, such as:

  • Costs with creative team;
  • Amount invested in paid media;
  • Amount spent in marketing automation services;
  • Development of Sales Pages, etc.

To illustrate this topic, I will once again use the example of the carpentry course.

Let’s suppose that, to promote your product, you created two Facebook campaigns, investing exactly the same amount of money and scheduling both campaigns to run for the same period.

In campaign number 1 you achieved a conversion rate of 25%, whereas in campaign number 2 the conversion rate was 12%.

If the total amount of sales made was $3,500, the campaigns generated $875 and $420, respectively.

As both of them were made with the same budget, it is clear that the first campaign had a much better performance.

However, if more money had been spent in the first campaign, its ROI would have been lower, even though it generated a higher sales volume.

What about another example?

The same carpentry course generated $25,000 in sales, but you spent $5,000 in a campaign that achieved a 30% conversion rate.

The 30% of sales generated by your campaign represent $7,500. If we apply the formula of the return on investment, it would look like this:

7,500 – 5,000       X 100 = 50%

___________

5,000

However, on the second campaign, $2,000 were spent to create a Landing Page, which achieved a conversion rate of 22%, or $5,500 from the total amount generated by your sales, and therefore:

5,500 – 2,000

____________          X 100 = 175%

2,000

You can see that the ROI from the second campaign was much better.

Understanding your ROI

Now you have learned how to calculate the ROI, it is important to understand what these numbers mean, so you can optimize your actions from now on.

Let’s suppose an advert has a high click rate, high view rate, but low conversion.

What does that tell us? Maybe the Landing Page for that ad is not so good, maybe the Call-to-Action was not persuasive enough, or maybe the visitor didn’t see anything of interest there.

The failure may also be in the campaign segmentation, which is sending unqualified leads to your Sales Page, and who are probably not prepared for that purchase.

Whatever the reason for the poor performance of the campaign, you will need to perform a few tests until the ad is aligned with the interests of your buyer persona and more compatible with your offer.

Conclusion: calculating the ROI to determine if your campaign is effective is not enough.

There are many variables that influence the performance of a group of ads, and, in some cases, a simple change in the Landing Page to improve conversion rates is enough.

Why should you measure the ROI for your business?

ROI is only one of the metrics that can be used to understand how healthy your brand is.

Through a careful analysis of this data, you can identify the main sources of income in your business, the most efficient communication channels to promote your product and if the performance of your marketing campaigns is going according to plan.

Only then will you be able to come up with strategies that will improve your sales in a continuous manner, and make sure your business venture is sustainable.

In order to have an assertive analysis of your ROI, it is important to differentiate the metrics that genuinely contribute to the strengthening of your business, from vanity metrics, which are the ones that bring visibility, but do not convert in terms of leads and sales.

For instance, the increase in the traffic to your blog can indicate that the content published there is attracting more visitors, but in order to calculate ROI the number that really matters is how many of these are actually becoming leads, signing up for your newsletter or buying your product.

That doesn’t mean that you shouldn’t worry about increasing the traffic to your blog or getting more Facebook followers. After all, these are important numbers for you to become an authority in your segment.

But to have a relevant metric, you have to turn this traffic into leads, leads into sales, and customers into evangelists for your brand.

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