In this article, we will discover how to determine the ROI of your marketing actions using Return on Investment Formula or ROI Formula to Maximize the Profitability of Business Quickly.

As we explained before in this article “What is the Return on Investment (ROI)? ROI Definition and Usage“, that every effort made by a company must be measured in terms of conversion and results obtained from the amount invested in it and that is exactly what ROI does.

And Return on Investment (ROI) comes from the acronym “Return On Investment“, this is a financial indicator that measures the profitability of the company comparing the profit obtained with the investment made, that is, this tool allows to know the performance that the company has financially.

It is one of the most useful metrics that should be known about a business, it is essential since it provides information on whether there is monetary gain or not through the investment that is being made.

When to Calculate the ROI?

The return on investment “ROI” is mainly used to evaluate an investment project. If the value is positive the project is profitable, the greater is this value higher profitability, it means that a higher percentage of invested capital recovered. But on the contrary, if the ROI is less than or equal to zero, it means that the project is not profitable, and if carried out, money would be lost from the invested.

In this same way, it allows comparing different investment projects, the one with the highest value will be the most attractive for its profitability.

It is worth noting that due to the simplicity of its calculation, this is one of the main indicators used in the evaluation of investment projects, however, it should be kept in mind, that it does not take into account the time and value factor of money over the same, so it is recommended to use it along with other financial indicators.

Calculation of ROI (Return on Investment) by Return on Investment Formula or ROI Formula

To calculate the ROI of investment we must know the investment (capital) that has been made or will be made, and the profits, gains or benefits that have been obtained or that are expected to be obtained with the investment.

In the case of a company, to know the profits that have been obtained we must go to its income statement, and to know the profits that are expected to be obtained we must go to its projected income statement.

Once we know the investment and the profits or earnings, there is a formula “ROI formula” that gives you this value depending on the investment made and the benefit obtained or that you plan to obtain.

we apply the Return on Investment Formula or ROI Formula, which is as follows:

The benefit obtained or that you plan to obtain from an investment subtracts the cost of the investment made; subsequently, divide that result between the cost of the investment and the result obtained from that operation represents ROI.

ROI = ((Total Profit – Cost of Investment) / Cost of Investment) x 100

Or

ROI = (Net Profit / Cost of Investment) x 100

Return on Investment Formula or ROI Formula
Return on Investment Formula or ROI Formula

Where :

  • ROI: return on investment index.
  • Total Profit: profits or benefits obtained or that are expected to be obtained by the investment during a certain period of time (Net Profit + Cost of Investment).
  • Net Profit: Total Profit – Cost of Investment
  • Investment: capital that has been invested or is going to be invested.

The result obtained by applying the ROI formula will be in percentages and indicates what percentage of the investment made or that will be made has been recovered or earned, or will be recovered or earned.

Possible results :

  • An index greater than 0 means that the investment is profitable.
  • An index equal to or less than 0 means that the investment is not profitable.

Examples of how to calculate ROI

Here are some examples of how to calculate and interpret ROI:

Example 1

A company whose total investment was the US $ 4,000, obtained net profits of US $ 1000 at the end of the period. What is its ROI?

Applying the Return on Investment Formula or ROI Formula:

ROI = (Net Profit / Cost of Investment) x 100
ROI = (1000 / 4000) x 100
ROI = 25%

It gives us an ROI of 25% with which we can affirm that the company (or the investment made in the company) in profitable, and obtained profitability of 25%.

Comments:

  • As the ROI is greater than 0 the company is profitable (the higher the ROI of a company, the more efficient it is when using its capital to generate profits).
  • If an ROI equal to or less than 0 had been obtained, the company would not be profitable (investors would have lost money).

Example # 2

An investment project has an investment of US $ 5,000, and a net profit forecast for a given period of time of US $ 800. What is the ROI?

Applying the Return on Investment Formula or ROI Formula:

ROI = (Net Profit / Cost of Investment) x 100
ROI = (800/5000) x 100
ROI = 16%

It gives us an ROI of 16% with which we can affirm that the project is profitable and offers us a return of 16%.

Comments:

  • Since the ROI is greater than 0, the project is profitable (the higher the ROI of a project, a greater percentage of the capital will be recovered when it is invested in it) and, therefore, is viable or feasible.
  • If an ROI equal to or less than 0 had been obtained, the project would not be profitable and, therefore, would not be viable or feasible (since if the money was left, the money invested would be lost), and we should look for other projects to invest in.

If in addition to this project, we had other project alternatives with an ROI of 20%, 25%, and 10%, in theory, we should choose the project that has the highest ROI since it is the one that offers us a greater return on our investment.

How to Calculate the Return on Investment in Marketing

The ROI calculations of marketing campaigns can be complex; it may have many variables both on the profit side and on the investment side.

But understanding the formula is essential if you need to produce the best possible results with your marketing investments.

For the marketing ROI, the hard part is determining what constitutes your “return,” and what your true investment is. For example, different vendors might consider the following for return:

  • The total revenue generated for a campaign (or gross revenue or turnover, depending on the type and location of your organization, which is simply the top-line sales generated by the campaign).
  • Gross profit, or an estimate of gross profit, which is income minus the cost of goods to produce/deliver a product or service. Many sellers simply use the company’s COG (Cost of Goods Sold) percentage (say 30%) and deduct it from the total revenue.
  • Net profit, which is the gross profit minus expenses.

On the investment side, it is easy for sellers to contribute to the costs of media such as investment. But what other costs should be included? To run your campaign, you may have:

  • Creativity costs
  • Printing costs.
  • Technical costs (such as email platforms, website coding, etc.).
  • Management time
  • The cost of sales.

Return on Investment Formula or ROI Formula

A basic formula uses the gross profit of the units sold in the campaign and the marketing investment for the campaign:

ROI = Gross Profit – Marketing Investment / Marketing Investment

You can also use the customer’s lifetime value (CLV) instead of the gross profit. CLV is a measure of the benefit generated by a single client or set of clients during their useful life with your company.

ROI = Value of customer life – Marketing investment / Marketing investment

However, some companies deduct other expenses and use a formula like this:

ROI = Profit – Marketing Investment – * Allocation of General Expenses – * Incremental Expenses / Marketing Investment

These expenses are generally recorded in “Sales and general expenses”, but some companies deduct them in ROI calculations to provide a closer estimate of the real benefit that your marketing campaigns are generating for the company.

The components to calculate the marketing ROI may be different for each organization, but with solid ROI calculations, they can focus on the campaigns that offer the highest performance.

For example, if a campaign generates an ROI of 15% and the other 50%, where will you invest your marketing budget next time?

And if your entire marketing budget only returns 6% and the stock market returns 12%, your company can make more profits by investing in the stock market.

ROI helps you justify marketing investments. In difficult times, companies often reduce their marketing budgets, which is a dangerous measure since marketing is an investment to produce income.

By focusing on the return on investment, you can help your company move away from the idea that Marketing is a spongy expense that can be cut when times get tough.

A practical example to calculate the Return on Investment.

An investment of $ 1,000 in advertising allowed you to get $ 2,500 in sales on your website. The ROI calculation would then be (2500 – 1000) / 1000 = 1.5 (you would get 150% off your advertising investment).

This value is ideal for calculating the effectiveness of a campaign. The actual ROI of the campaign must be calculated considering also the operational cost necessary to obtain that income. For example, if calculating in percentage terms, the cost to distribute orders has been $ 200, the ROI, in this case, would be (2500 – 200 – 1000) / 1000 = 1.3.

Calculating the ROI is essential to decide on future investments. With this data, you would have the information you need to evaluate which projects are more profitable and as a result, you will have an idea of ​​what type of actions are better for the future.

To measure the ROI of the actions in Adwords you will have to track the conversion, that is, of the actions that you want your customers to do on the website after clicking on your ad, whether it is to make a purchase, register or download some content.

How to optimize ROI?

The majority of companies whose objective signifies to improve their presence and results through online actions focus on increasing qualified and segmented leads ( lead scoring), the conversion of these business opportunities, and loyalty. The main indicator in these cases that should be enhanced is the ROI.

SEO is the main source of lead generation within the Inbound Marketing methodology. To raise or optimize the ROI in these cases, it will be necessary to strengthen the corporate blog, organic traffic, and content amplification through social channels.

Choosing to implement a mix of several actions is also a great help.

Applying strategies such as Content Marketing contributes to the optimization of ROI, resolves problems that have led to the decline in business confidence, towards the effects of advertising in traditional media such as radio, television or the newspapers. According to the latest report published by the Hubspot company:

  • Blogging as a content marketing strategy is 13 times more likely to generate ROI in positive.
  • Participation through email marketing ranges from 1.5% to 4.79%, varying according to the industry.
  • It is impossible to measure the ROI of 100% in traditional media.
  • Content marketing will generate $ 300 billion in 2019.

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