Return on investment, or ROI, is a calculation of the profit of an investment divided by the cost of an investment. It refers to business expenses or a group of expenses and can be applied to numerous areas of business, like specific campaigns, ad sets, or a department overall.
Chances are if you’re anywhere near business or marketing you hear about ROI everywhere. So how does ROI work, and why is it so important? And how can ROI help you make better decisions as marketers?
Read to find out everything you need to know about ROI.
What is ROI?
ROI stands for return on investment. Put simply, it’s the percent difference between profit and investment.
It’s a simple ratio that can help you understand the value of your investments. So how do you calculate ROI?
Calculating ROI
ROI is represented as a percentage, so any ROI formula you find will multiply by 100. Here's one simple formula that you can use to understand how ROI works:
ROI = (return - initial Investment / initial investment) x 100
So, for example, if your net profit was $5000 and you invested $4500, your calculation is (5000-4500/4500) x 100.
Knowing how to calculate ROI is crucial so you understand what it means and how it works. But it’s more likely you’re using an analytics system to actually find ROI - you’re not calculating it manually, but understanding how it works increases your understanding of why it works, and why it’s a valuable metric to track.
Why is ROI Important?
ROI can tell us a lot. First, it’s important to see how each marketing investment and team is performing so we can see if budgets are being used effectively.
Second, it also informs our strategies. When you see a high ROI, you dig deeper and investigate to understand what went right. On the flip side, when you see a less-than-desirable ROI, you should find out what happened that made your ROI fall short and avoid using those same strategies in the future.
Finally, tracking ROI for each marketing campaign gives you benchmarks to follow in the future. Tracking your ROI per campaign is critical to ensuring you continue making smart, strategic decisions.
What’s a Good ROI?
The idea of a “good ROI” can be tricky. Generally speaking, you want your ROI to earn a dollar for every dollar you spend. A ratio of 5:1 ($5 for every $1 spent) is considered “good” across the board, and anything below 2:1 is not considered profitable.
But the ROI you establish for your campaign or department will vary depending on your own data and goals. So, if you run a Facebook campaign with a 300% ROI, you’ll set a similar but more ambitious goal for the next similar campaign you run. The idea is that you’ll learn from your past campaigns, make adjustments, and improve the ROI for your business.
Average or good ROIs will vary across industries, departments, and campaigns. While knowing a “good” ROI for each of those categories is important, it’s even more important to use historical data to set the right ROIs for your company. These will be more helpful and accurate than using general averages and data.
When working with ROI, consider these tips:
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Focus on ROI that’s established by benchmarks you set in your own company and campaigns rather than general standards
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Don’t be too narrowly focused on ROI. It’s a part of other metrics that can talk about profits and investment margins, and like any metrics, doesn’t tell the whole story.
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Use analytics platforms that are insightful and intuitive. Don’t leave things to chance or waste time being confused about your ROI and what it means. Invest in an analytics tool that gives you what you need.
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