What does ROI mean in marketing, how to calculate it and why is it important

In this article, I will tell you what ROI is, how to calculate it, why it is so important, and what other performance indicators exist.

Profits cannot increase in the snap of a finger. In order to achieve a result, you need to make sure that your investments are paying off. ROI means Return on Investment. Thanks to this indicator, you can calculate not only your advertising performance but also the performance of your business as a whole.

ROI is calculated by this formula:

where gross profit equals revenue minus net cost.

For example: for one month, you had 59 transactions for the sum of $56 000; the marginality (the difference between the product price and its net cost) is 25%, thus, your gross profit will be $14 000.

At the same time, you spent $8 000 on advertising, $1 000 on the salary of an advertising specialist, $1 000 on the services of a programmer; as a result, you will get the following:

ROI can be calculated automatically via different services provided that they are configured correctly. You can calculate ROI in Google Analytics as well as in special services, such as Roistat, Alytics, Owox BI.

You need this indicator to draw up a marketing strategy and understand which traffic source is more profitable. At LeadMachine, all our work is built around this indicator; this is called ROI marketing.

If your investments are still inefficient after calculating the ROI, you need to look at the sources of acquiring traffic to your website; for example, paid search advertising can work, but email marketing can not yield profit.

Another indicator will help you to calculate the payback of a particular traffic source which is ROMI (Return on Marketing Investment).

You need to calculate the ROMI of each traffic source separately. Let's suppose you spend $5 000 on Google Ads which yields you transactions for $50 000; the ROMI of this source will be 900%.

At the same time, you spend $5 000 on Facebook Ads which gives you transactions for $1 000. Thus, the ROMI will be -80%.

The overall ROMI will be 410%. When you see this distortion, you'll find out that something is going wrong and you need to optimize your Facebook Ads campaigns.

Another indicator that can improve ROI is CAC (Customer Acquisition Cost). It shows how much you spend on acquiring a new customer. Here is the formula:

where CAC is the customer acquisition cost, MCC is the total marketing campaign costs, and CA is the number of customers acquired.

If this indicator is large, you should either increase your customer's lifetime or reduce costs.

You need to understand that ROI depends not only on the quality of advertising but also on the work of the sales department; let's say, you have generated 100 leads, of which only one lead ended up with the sale.

It is important to realize that ROI does not only depend on the advertising quality; it also depends on your sales department performance. Let's suppose that your ads have generated 100 leads, only one of which ended up with a sale. As a marketer, you did your job perfectly, but the sales department let you down.

Calculating ROI is important to understand the overall pattern of business development. If this indicator is low, you need to urgently change something in the business: analyze the work of the sales department, advertising campaigns, website usability, demand for services or goods (as it can be seasonal).

It is easier to calculate ROI for e-Commerce when the average margin is known. If you have a plant that sells in the B2B segment, everything will be more complicated.

There may be different profits every month, although advertising and sales departments work perfectly; one month, there can be one large order when the plant is loaded for six months, and during another month, there can be downtime. In addition, in this industry everything depends on individual agreements, there is no clear margin. Therefore, it is difficult to calculate ROI in complex areas.