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Understanding Return on Investment (ROI)

ROI is a financial metric based on the relationship between the money earned and invested in a specific action. It means “Return on Investment”. This return calculation is widely used in marketing to validate the investments made.

To choose the right investments, you must understand which strategies will give results and help the business meet its objectives.

But with so many customer acquisitions and retention tactics, how do you know what works best for your business?

It seems complicated. But the answer is to calculate the 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’ll explain everything you need to know about this impressive metric!

What is ROI (return on investment)?

ROI is the acronym for “Return on Investment. This indicator makes it possible to know how much money the company is earning (or losing) with each investment made.

This includes everything done to obtain future profits, such as marketing actions, sales training, acquisition of management tools, and new customer retention strategies, among others.

In this way, it is clear which investments are worthwhile and how to optimize those that are already working to have a better performance.

ROI can be calculated in several areas, such as:

  • Content Marketing ROI;
  • email marketing ROI;
  • Social Media ROI;
  • ROI of campaigns in Google AdWords;
  • ROI corporate blog;
  • SEO ROI;
  • among others.

Why is ROI important to the success of my business?

Apart from that, remember that Digital Marketing actions, although reliable and effective, can offer different results depending on your market niche and target audience, among other details.

Therefore, controlling ROI is essential. It helps answer some deep questions about your business, like these:

  • What are the company’s biggest sources of profit?
  • 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 solely by looking at a specific ROI period. Still, it will give you a good direction of where to look.

Then, using other important metrics and indicators, you will be able to 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. Working in this way makes it 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. We’ve created an interactive calculator to simplify this process, so you need to enter your numbers and hit the “calculate” button.

What is classified as “income”?

Revenue is everything the business collects from sales. When calculating ROI for a specific area or campaign, remember only to use the amount raised by the chosen segment.

For example, to calculate the return on investment for an eCommerce platform in its 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 eCommerce platform, the costs are represented by the amount paid to use the platform, the price of hosting the website, the investments in paid advertisements, the expenses with the Internet, telephone, and everything else be necessary.

How to evaluate the results of your business?

To better explain this metric, let’s analyze the fictitious case of the virtual store mentioned above.

Suppose the company received Rs.14,000 in sales and Rs.5,000 came through the online store.

To keep the site running, you need to spend Rs.1,000, while the physical store needs Rs.3,000.

In this case, the ROI of our electronic 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 Rs.1 invested, you will receive Rs.4.00 in profit.

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 final result can vary greatly. It all depends on the action taken and the quality of planning and execution, among other details.

The important thing is that with the ROI in hand, it is possible to analyze:

  • What was done (or not done) that could have influenced this result?
  • Is there a relationship between high-yield investments?
  • What do high ROI shares have that can be replicated in others?
  • Are the campaigns performing similarly to my competitors?
  • Does your company have better results than others in the sector?

In the example above, the result was positive, but it can also be negative.

In these cases, 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 previous 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, is a 5% ROI good or bad when interpreting it? It depends! Keep reading, and you will learn how to interpret ROI.

ROI does not take into account the duration of the investment

It is a wonderful result if we talk about an ROI of 5% per day. 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 consider the increase (or decrease) of inflation. In other words, a 5% annual return would be dissolved by rising inflation or other banking problems (taxes, fees, etc.).

ROI does not take into account seasonality

Another limitation of this metric is that its result does not take seasonality into account.

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 the negative results of certain periods.

ROI calculation can be manipulated

Finally, it is very important to understand where the numbers used in the calculation come from when analyzing the results.

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 from each product as revenue and the total value of all resources used to produce and sell the product as cost.

Because of this, anyone using ROI to evaluate an investment needs to 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 looking at your investments and figure out where to put your energy. And this is great!

But before that, it is important to overcome certain challenges that can make it difficult to use ROI well in your future strategies.

Here are some tips!

1. Forget vanity metrics

ROI is just one of many indicators that we can use to understand better how a business is doing. However, ROI can point to more than just well-known metrics in certain cases.

If that’s the case, what’s probably involved in using what we call vanity metrics. They are great at 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 the conversions, such as generated leads and conquered customers, among others. Such data is only possible with careful monitoring of the return on investment.

2. Adapt quickly

After investing so much time, energy, dedication, and a lot of teamwork and money to get a campaign off the ground, 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 turned out to be deficient.

It is important to adapt quickly, whether making big changes in planning or even abandoning once and for all that proposal that seemed like the ideal solution for a particular problem.

The ability to understand changing circumstances and react to them quickly is one of the most important characteristics for anyone who wants to use ROI information in the best possible way.

3. Keep an eye on the market.

Nothing is permanent in Digital Marketing, so keep an eye on what is happening in the market. The strategy that works today may not be as good tomorrow. The reverse is also true.

But what does it mean to pay attention to the market? Closely observe the evolution of your audience’s tastes, desires, and needs. 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 take the lead in deciding what strategies to adopt in the future.

ROI tracking is much more than a numbers game. It also requires insight and sensitivity on the part of decision-makers to swap out what isn’t working and improve what is already good.

4. Do not hide information about your team.

More than monitoring the ROI of each campaign and action, it is vital to share the objectives and observations with everyone in the company.

If you do, you will encounter 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 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 the particular efforts but the final result.

5. Be patient when evaluating investments.

 We always talk about how Digital Marketing has evolved over the years and how important it is to keep up with what’s working.

However, do not 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 paying off. Otherwise, you can waste a strategy that would work by making changes ahead of time.

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 are wondering what happens after overcoming these challenges? Read on to learn about some of the benefits that ROI brings.

5 advantages of knowing how to work based on ROI

After the effort comes to the reward, right? Therefore, there is nothing fairer than seeing good results in calculating ROI and acting correctly. Next, we will discuss the advantages 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 evaluation is what we are interested in: by showing which investments are worth keeping, the tactics that should be abandoned are also automatically displayed.

In this way, both unnecessary expenses and any investment that does not produce profits will be eliminated little by little.

2. Increased earnings

Cutting unnecessary expenses helps increase revenue and, in turn, profits. But let’s not stop there! 

 Using money most effectively—for instance, by moving it from ineffective to effective methods—can only lead to one outcome: increased profits.

After all, you will have more resources and time to spend on working campaigns to optimize them over time.

3. Lasting results

It doesn’t make sense to have astronomical growth for a few months and then go back to a pattern of waste and bad investments, right? With that in mind, ROI tracking is an ongoing process; it can never be sidelined.

Since the ultimate goal is to be consistently profitable, no matter how much time passes, you can expect long-lasting results once you get into the habit of doing this calculation.

The only thing necessary for this is maintaining the follow-up cycle and taking quick actions to correct the problems found.

4. Increased self-esteem of the team

Who would not like to work in a successful company? The created projects work well, and the established objectives are always achieved?

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 group with doubts about its possibilities?

5. Strengthening the culture

It is not an exaggeration to say that monitoring ROI can also shape 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 company.

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 your company’s health, both in direct 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 other metrics worth tracking? Learn about the main marketing metrics to evaluate your conversions and increase your income.

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