What is ROI? = Return on Investment

Understanding how to calculate your company’s Return on Investment (ROI) for any business expense is the first step toward growth. ROI – is a simple concept, but it can be measured in different ways.

Updated on: 2022-03-16

Name: Return on Investment

Referred to as: ROI

Category: General

Description:

Return on Investment (ROI) is the net profit generated from a spend. In business, it’s possibly the most important metric of success and a key KPI (Key Performance Indicator).

Correct Use: n/a

ROI = Return On Investment

Our take:

Return on Investment is a metric used to measure the effectiveness of any business investment or venture. In marketing, this metric is known as Return on Marketing Investment or ROMI. ROMI is a subcategory of Return on Investment. Here the costs are incurred on marketing campaigns.

This metric is more commonly used in the online marketing industry. Marketers measure the effectiveness of their campaigns using the ROI or ROMI metric as the benchmark. A marketing campaign’s ROI will indicate its success or failure in relation to the specific marketing objective behind the campaign.

Running a business or a venture always involves costs. The costs can be monetary (e.g., direct payments) or non-monetary (e.g., time spent on the investment). Either way, to gauge the effectiveness of your business venture or investment, you need to calculate its ROI.

In digital marketing, companies spend three types of resources – time, labor, and money. These resources are spent across various such as – web development, social media, print, etc. Marketers gauge the efficiency of their marketing campaigns by tracking their ROMI.

In simple terms, ROMI is measured by calculating the total revenue generated from the marketing campaign against the marketing investment. One basic formula for calculating the ROI on any business investment is:

(Gross Profit – Investment) = Net ROI

But, in real practice, using such basic metrics or calculations isn’t helpful. Your ROI must reflect the actual impact of your investment. For example, direct figures like “gross profit” can be misleading in marketing. There are different ways to calculate ROI in different industries.

For example, in internet marketing, the returns you’re looking for may vary depending on your campaign goals. After assessing your investment of time and money into a marketing campaign, you can focus on different KPIs –

  • Are you assessing the number of times your brand has been introduced to new target customers?
  • The number of target customers who have visited your company website?
  • The number of target customers who contacted your brand on social media?
  • The number of new customers/leads your firm has acquired as a direct result of the marketing campaign?

All of these KPIs can indicate the true strengths and weaknesses of a marketing campaign. Savvy business professionals always aim to evaluate all the combined effects of their investments into a business venture. To do so, they use different variables and metrics to determine the “true ROI” of their investments.

Marketing professionals constantly analyze all types of variables, metrics, and KPIs of their campaigns on a regular basis. These metrics and KPIs help them get a broad sense of whether their marketing investments are resulting in profitability.

Constant monitoring is the most effective way to assess the actual strengths and weaknesses of their marketing efforts and investments. Here are some of the metrics professional digital marketers use –

  • Unique Monthly Visitors: Discusses how many people are visiting your site on a monthly/weekly basis. This can be tracked directly with Google Analytics.
  • Cost Per Lead (CPL): If you’re paying to obtain leads (e.g., paid traffic), your CPL will determine your profitability. High CPL means low or poor ROI.
  • Cost per Acquisition (CPA): This metric reveals whether your investments into lead generation are actually acquiring customers for your company.
  • Customer Lifetime Value (LTV): Marketers use historical customer data to understand how much advertising spend per customer is net profit.
  • Average Position: This metric reveals the search engine rankings you receive directly from your Search Engine Marketing (SEM) campaigns.

These are some of the metrics that give digital marketing professionals a general sense of their campaigns’ effectiveness and profitability. Before launching any digital marketing campaign, managers must define these metrics (or others). They should also clarify what data sources will be used to conduct this analysis.

Extra reading

Do:

Adopt a scientific approach to determining business ROI. Try to factor in as many variables, KPIs, and metrics as possible to obtain a broader view of business profitability. Use weekly/monthly reports that detail the results of your business investments. Always keep a finger on your company’s true ROI with constant monitoring.

Don’t:

Take a simplistic approach to calculate ROI.

Tip:

The way companies calculate ROI should evolve with time. Over time, companies must adopt more nuanced metrics and more efficient investment tracking techniques to calculate ROIs more accurately.

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