What is ROI? Learn about its role in online marketing

ROI is one of the most commonly used metrics, or even acronyms, for evaluating the effectiveness of marketing efforts. Return on Investment (ROI) is the return on investment or profitability index. In other words, ROI shows the value of an investment (profit) compared to its cost, and also shows the realization of KPI It provides a simple way to quickly assess the effectiveness of a given project, investment or campaign. However, the company’s goal will not always be infinite growth.

Template for ROI calculation

The formula for ROI is (revenue minus expenses) / expenses.

Example? Suppose an advertiser spent PLN 100,000 on an online campaign, generating sales of PLN 800,000 from it. In this case, the profit on the total investment is PLN 700,000, and the ROI is calculated by dividing the profit (PLN 700,000) by the cost of the investment (PLN 100,000) and multiplying the result by 100%. In this case, the ROI will be 700%.

Please note that the ROI in this case does not take into account such costs as:

• product/goods purchase costs
• labour costs
• fixed costs of the enterprise

Thus, it may turn out that such a calculated return on investment (ROI) will not even keep the company profitable. Everything here depends on the fixed costs and the margin achieved.

ROI, a ROAS?

The formula for ROAS is: advertising revenue/advertising costs

Continuing with the example above, ROAS in this case will be 800% because 800,000 PLN revenue is divided by 100,000 PLN (advertising costs).

In our example, the main difference is the denominator, where in ROI takes into account the profit, and ROAS the entire revenue.

ROI is a much more capacious indicator, often used to assess the overall soundness of an investment. Hence, it can take different definitions of revenue, cost or profit.

The main difference, therefore, is that ROI considers the full range of costs and revenues associated with an investment, while ROAS focuses solely on the return on advertising expenditures.

How to use ROI?

ROI is an indicator for marketers and basically any investment where numerical values count.

Let’s take the example of a startup founder allocating funds to marketing. Let’s assume that he invests PLN 30,000 in his project’s marketing campaign, achieving revenues of PLN 500,000. This translates into a return on investment of 1,566%, which can be considered a great result.

Similarly, a real estate investor exploring income opportunities can use ROI to make informed decisions. E.g., he can use ROI to evaluate two alternative investments: buying an apartment in location A or location B. By calculating the potential ROI for each option based on projected costs and revenues, he can make a better decision.

What ROI is high enough?

ROI is adequate if it provides the level of return in marketing that allows the company to make money, i.e. be above the break-even point. Most e-commerce businesses expect an ROI of 500-1000% to make a profit.

In more traditional terms, achieving an annual ROI of about 107% (i.e., a return of 7%) or more is considered favourable for investments in stocks, bonds or other equity investments. This benchmark provides a measure by which investors can evaluate the performance of their portfolios.

Determining the expected ROI should answer questions such as:

• What level of risk do I incur?
• What is the scale of operations?
• What are the potential consequences if I incur losses? How long can I sustain them?
• How much return do I need to justify accepting this risk?
• What alternative investment opportunities am I considering?

Roi Limitations

The ROI indicator is not without limitations. First and foremost, ROI does not take time into account.

If one investment had an ROI of 40% in five years and another had an ROI of 30% in two years, basic ROI calculations cannot help determine which investment was the best. What matters here is the time value of money.

The second limitation of ROI is that the basic formula fails to capture the scale of operations. One can imagine a situation in which a lower ROI means a worse outcome for the company. An example?

The company sells bicycles and generated sales of PLN 1,000,000 in one year by investing PLN 150,000 in digital advertising.

A competing company generated revenue of 2,000,000zl by investing 400,000zl in online ads.

In the first case, the company achieved an ROI of 566% and a profit of £850,000. The second, on the other hand, achieved an ROI of 400% and a profit of 1,600,000zl. As you can see, despite the lower ROI, the second company made much more profit!

Challenges when calculating ROI

Calculating accurate marketing spend can be complicated

It seems simple, but do you include all costs in your ROI calculation?

• Production costs: services, software, production and human labour, and advertising materials.
• Promotion costs: advertising costs, agency costs, freelancers, creative and video costs?
• Site analytics: costs of data maintenance and tracking implementation?

Analysis too short

A good business plan considers the long-term and short-term benefits in terms of marketing expenses. Focus on long-term benefits more than on one-day or one-week analyses.

Focus on long-term benefits.

Consider everything that can help you build lasting customer loyalty – it’s a process for years!

Compare to competitors

Why doesn’t it work for me if I know my competitors are doing great? This question often comes to mind. Remember that every business and environment is a different perspective. You don’t know your competitors’ exact figures and operate on guesswork. You also don’t have access to a full cost analysis. You also don’t know your competitors’ funding sources and goals.

Why ROI is important?

Business owners rely on data-driven measurements, such as marketing return on investment (ROI), when deciding how to allocate a budget. ROI helps those involved in a project understand whether they are using media effectively, targeting campaigns well, and getting a market fit for their product.

Awareness of financial health: marketing ROI allows you to understand the amount of return on a given project. This makes it easy to compare campaigns, ad groups, the ads themselves, or the effectiveness of keywords.

Return on investment.

Understanding the competition: Many professionals compare their ROI with competitors’ efforts or “benchmarks.” As I mentioned earlier, this is not always the best idea.

Understanding your competitors

Prioritize your current projects: By measuring the ROI of your various marketing campaigns, you can identify which ones are generating the most value from every penny and prioritize your work on those campaigns. Similarly, you will identify the weakest campaigns, which you can turn off, reduce, or modify.

“What works?”: Collecting ROI data for different marketing campaigns can help you identify patterns of which marketing methods are most effective with your target audiences and bring in the most revenue. That way, you can improve subsequent campaigns.

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Multiple contact points before purchase

One of the challenges of calculating ROI is attribution models It usually takes at least a few points of contact before a potential customer makes a purchase decision. Therefore, you need to understand the relationship between these points in the sales funnel and apply an attribution model that measures their contribution on the path to conversion.

For example, a user might click an ad for Tik Toku, then read a blog post and make a conversion only two months later by searching Google for your brand name. This sale will show up as “organic search” in the last-lick model when, in fact, it’s probably a combination of TikTok ads, content marketing and SEO.

Summary. ROI in marketing.

ROI is one of the key indicators in marketing that simply depicts the effectiveness of a campaign, medium, or advertisement. However, it has limitations, such as time value and attribution models. On the other hand, higher ROI does not always mean higher profit for a company. Hence, the larger the scale of the business, the lower the ROI may be but continue to generate more profit for companies.

It is worth analyzing ROI, ROAS, or studying ROI, but keep in mind the limitations and supplement the metrics with data such as profit generated or customer lifetime value (LTV) compared to customer acquisition cost (CAC).