What does ROI mean in marketing, how to calculate it and why is it important
What is ROI and how to calculate it?
ROI is calculated by this formula:
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:
Why ROI is the key indicator?
What to do if ROI is low or negative?
Another indicator will help you to calculate the payback of a particular traffic source which is ROMI (Return on Marketing Investment).
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:
If this indicator is large, you should either increase your customer's lifetime or reduce costs.
Problems in ROI calculation
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.
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