The ROI formula allows you to monitor the effectiveness of your investments and is among the key performance indicators: here is how it is calculated, what exactly it is used for, and why you should definitely know and apply it.
Not to be too materialistic, but it is clear that whatever you do in your job, you do it because you want to bring home the bacon.
Now, don't get me wrong: there is more behind one's professional accomplishment than just money. If you know me or have been following me for a while, you know that what I always encourage you to do is to leverage your knowledge and skills to make an impact In other people's lives.
Making a difference, this should always be your goal.
However, I guess you also have to pay the bills-as does everyone else!
That's why, in the end, your work must also allow you to live peacefully while also meeting your more, shall we say, "earthly" needs.
Why am I giving you all this talk?
Because I want to make you think about how important it is to know whether what you do agrees.
Put another way: you should always understand whether your investments bring you a result, whether they are worth it, in short.
I have already told you about the importance of the Data Analysis and of the KPI to monitor the effectiveness of your web marketing: whether it is CPM, impressions or whatever, you need to know where you want to get to, how you can get there, and what are the indicators that tell you if you are on the right track.
In particular, among the various metrics, there is one you need to measure the profitability of marketing campaigns: the ROI, that is, the return on investment.
Do you know anything about it? Or are you completely unaware?
In any case, let's get some clarity on this: read on to find out. What is the ROI formula, exactly what is it for and why is it important.
What is ROI
Okay, before you calculate it, you should know exactly what we are talking about.
One of the most important things to do when you start a marketing campaign is to understand its impact and profit: you need to know whether your efforts are getting you where you want to be, whether the performance is meeting your expectations. Not only that: the information you gather in the process also helps you adjust future strategies, basing them on more informed and intelligent decisions.
Put another way: whenever you invest money or time in your business, you need to be clear about your goals and measurement metrics to make sure that this commitment bear fruit.
Here, ROI calculation is exactly what you need to monitor the success of your actions in this regard: it tells you what works and what doesn't, so you can also make adjustments.
It is a financial metrics which compares the gain or loss of an investment versus its cost: among its many applications, in marketing it is one of the most important indicators to identify the most effective channels to engage and convert customers, as well as to better manage the budget for your advertising campaigns.
As I mentioned, ROI stands for Return On Investment (return on investment) and is a numerical value, a ratio, which measures the return on your investments. Basically, it answers the question, "What will I gain by investing tot in my business?" It lets you know whether the money you plan to shell out will come back to you in the form of profit.
ROI is expressed as a percentage, and to calculate it you simply divide the net profit (or loss) of an investment by its initial cost. Obviously, the higher the ratio, the greater your gain.
Usually, ROI is used in finance, to understand how much invested capital returns in terms of income, but increasingly it is also being leveraged in marketing to assess the effectiveness of promotional strategies.
How it is calculated: the ROI formula
Well, now that you understand what this is all about, let's see in concrete terms how you can calculate it. Fear not, it is much simpler than you can imagine!
You might find several formulas around for calculating ROI, but I offer here the one that is in my opinion the easiest and most straightforward.
Here it is:
ROI = (net profit / invested capital) x 100
ROI is then the net profit over a certain time divided by the investment cost, which is then multiplied by 100 to express the ratio as a percentage.
You'll think, all here?
I told you earlier that ROI is nothing but the ratio of what you invest to what you get back, Between resources used and benefits obtained. The easiest way to think about the ROI formula is to take some kind of "benefit" and divide it by the "cost." All of course referring to a single or precise investment, to see how profitable it is or is not.
I'll still give you a couple of practical examples.
Let's imagine that you have your ecommerce business and, at a certain time, you decide you want to invest €1,000 in social media campaigns to increase the brand awareness and sales. At the end of that period, you do the math and find that you have earned 5,000€ more than in the same months of the previous year. So here's how you can calculate the ROI of sponsored ads:
ROI = (5,000 / 1,000) x 100 = 500%
This means that for every euro you spent on ads, you recouped €5 in net profit. Consequently, you can conclude that your strategy was effective, that you probably got a whole range of things right, and that you can repeat the investment a second time, increasing your spending.
But ROI is also useful for you to understand whether the time you devote to a project is worth the monetary return: for example, in case you decide to earn something extra from your main job by offering yourself as a freelancer. Let's say you quickly find a client and earn €200 in the first month; meanwhile, however, you realize you've fallen behind on the rest.
You then decide to calculate your ROI of freelance work to determine how much time you should divide between it and your other business, considering that those €200 you earned by taking 20 hours of your time. You can calculate your ROI as:
ROI = (200 / 20) = 10€ per hour
So you can now assess whether each hour spent on your main occupation is worth more than 10€, and thus adjust the time you spend on your freelance work.
Interesting, isn't it?
What the ROI formula is for.
Knowing the ROI of your investments is critical not only to realize the actual return, but also to reason about how you have acted and how you can act in the future.
At the organizational level, the ROI formula then helps you make informed decisions and optimize your marketing efforts.
Here is in detail what is the point of understanding the ROI generated by a campaign:
Justify the expense
Clearly, in order to secure resources for future campaigns, those already invested must be justified: demonstrating the ROI of marketing efforts allows you to allocate the right budget based on the type of activity, being able to have an estimate of the ROI based on what you have already achieved. It is critical to know whether your ads are generating conversions and thus meriting further investment.
The possibilities that online channels offer you to promote yourself are so many, and you have an avalanche of combinations at your disposal. Each of them, however, requires a certain amount of funding and investment-that's why understanding what generates the most revenue is necessary for you to properly allocate budget and other resources.
As I told you extensively in my article on the Data Analysis, it would make no sense to pursue your business without having concrete results (i.e., numbers) in hand. This serves you, first and foremost, as a testimony to your value and your authority And secondly, to see if what you are doing is working for real. Measuring ROI allows you to do both, understanding the impact of individual campaigns on the overall growth of your business.
Guiding you in decisions
The ROI formula, when properly applied and analyzed in a given context, is a super useful tool for evaluating decisions made in the past and, based on them, making more informed ones in the future. By telling you how an investment directly contributes to your business, you can compare new business opportunities and choose which one to pursue, focusing more time and energy on what is really worth it.
So what do you think?
All super doable, don't you think?
Actually, I have to be honest with you: the ROI formula, while very useful, has some limitations (including the importance of having an exact measure of all costs and not taking into account risk or time horizon). That is why it should be considered like all other metrics that measure your performance, viz. In relation to other KPIs and embedded in a specific context.
Talking about a good or bad ROI regardless doesn't make much sense.
However, it is important for you to know that it is an important indicator, that it gives you a snapshot of your situation, and that you should use it as a starting point To see if the direction you are moving in is the right one.
Awareness and knowledge of the path you are on are prerequisites for success, and the ROI formula is among the most useful tools for achieving them.