ROI: how to calculate and use it in marketing

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ROI is a key metric in marketing analytics, along with key metrics such as LTV, CAC and NPS. It is a topic of interest to many business owners. In this article, we'll take a closer look at how ROI can be used to evaluate the effectiveness of advertising campaigns and discuss the best ways to use it to achieve business goals. The article also includes a handy template for determining ROI.

What is ROI?

ROI (Return on Investment) is an important indicator of the effectiveness of business investment. This metric is a ratio that reflects the return on investment. Specifically, the ROI formula is used to determine the level of return on investment, showing how profitable or unprofitable certain projects or products are.

Investment in this context includes all expenses related to the operation of the business, including employee salaries, rent, marketing expenses, the purchase of raw materials and supplies, and the purchase of software and other services needed to operate the business.

Calculating ROI is key when a company wants to assess how effectively it is returning on its investment, whether it is in team development, project implementation or an advertising campaign. This metric is widely used in end-to-end analytics to measure the return on investment of various advertising channels, including contextual and banner advertising, social media targeting, leaflet distribution and lift advertising. ROI helps companies understand how effective their investments are.

Why calculate ROI

The use of ROI calculation is extremely important for making management decisions in business, allowing you to avoid costly mistakes and determine the effectiveness of projects. As a key formula in analysis, ROI helps to determine the strategic direction of the company's development. It provides an opportunity to evaluate which projects and initiatives are worth investing in and which should be abandoned in order to ensure sustainable financial success and avoid unjustified losses.

ROI, ROMI, ROAS - what are the differences?

These three metrics - ROI, ROMI and ROAS - are often confused, but they have key differences that are important to understand for effective business management.

  1. ROI (Return on Investment) is a general measure of profitability that takes into account the return on all investments in a project. It measures the effectiveness of a company's overall investment, including but not limited to marketing. The ROI calculation includes all project costs and revenues.

  1. ROMI (Return on Marketing Investment) is a specific indicator that measures the return on marketing investment. ROMI focuses on the income generated from marketing expenses, such as advertising budgets, printing, billboard rental, but does not include expenses related to the production of goods or services.

  1. ROAS (Return on Advertising Spend) - this indicator is specifically designed to assess the effectiveness of specific advertising campaigns. ROAS analyses the ratio of income to expenditure for a particular advertising activity. It helps to determine whether a particular advertising investment is generating revenue and how effective individual advertising tools are.

ROI Calculation Formula

The ROI formula is a really simple and effective way of measuring the overall effectiveness of a business investment. It allows you to determine how profitable or unprofitable an investment has been, expressed as a percentage.

  1. Turnover in the ROI formula is the total amount of money received by a company over a period of time. This can include income from sales, services or any other income related to the business activity.
  2. Expenses in the formula are the sum of all costs and investments made to support the business. This can include the cost of materials, salaries, marketing, rent and other operating expenses.

When calculating the ROI for a particular project, only the income from that project is taken into account, and only those expenses directly related to that project are included.

It is important to note that ROI measures the return on investment, but does not take into account the time aspect of the investment. It is therefore best used for short-term evaluation and does not always reflect the long-term effectiveness of an investment.

What kind of ROI is good?

ROI, which reflects the ratio of benefits to costs, is not always fully informative when analysed out of context. For example, it is possible to achieve a high ROI, but this does not necessarily mean that the company is making a significant profit. Evaluating the effectiveness of investments based on this indicator alone, without taking into account the absolute values of revenues and expenses, can be misleading about the real benefits of advertising efforts.

In a situation where a company is selling the maximum possible amount of goods, ensuring optimal profit (without considering price increases), it is time to optimise advertising channels and increase ROI. If this level has not yet been reached, you should focus on increasing sales by investing more in market development and spending more on advertising, which may lead to a temporary decrease in ROI.

When to calculate ROI

It is important to understand that ROI is a practical indicator and is one of the so-called "actionable metrics". The difference between actionable metrics is that they don't just reflect the status quo, but also provide specific guidance on what changes are needed. This is in contrast to metrics that may be informative but do not provide clear guidance for action (e.g. customer churn rate or number of subscribers).

ROI is not an automatically calculated formula, like conversion, and is not measured in the background. ROI is calculated when you need to make a management decision, such as choosing between purchasing equipment or raw materials, changing or maintaining an advertising channel, or deciding the fate of a loyalty programme. For an accurate calculation, it is important to choose a period when there have been no significant changes in the advertising campaign, distribution or production methods.