What is ROI?

Posted by:

Estela Viñarás

 

For marketers, ROI is the Holy Grail, the metric of all metrics ... it is what  allows us to justify the value of our work and whether what we are doing really works.

Yet, despite its importance, there’s much confusion about what the return on investment actually means and how we can use it to improve our marketing. Let's put the record straight.

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What is ROI and how is it calculated?

ROI is the performance we obtain from an investment, expressed as a percentage. What it tells us is how many benefits we obtained for each euro invested.

To calculate, we can use this simple formula:

  • ROI = (obtained profit - investment) / investment x 100

For example, if we have invested 1000 euros and earned a profit of 3000, we will have:

  • ROI = (3000-1000) / 1000 x 100 = 200%

logically, the higher the return on investment, the more value we attribute to the action.

When calculating, we must take into account the time factor that is often overlooked. Sometimes, an investment can give very long term benefits, which are left unconsidered when applying the formula before obtaining all the return on investment. To properly measure the return on investment, it’s always worth considering how and when we will measure the benefits.

One of the most important uses of this metric is to compare different actions to one another to see which is more profitable and compare the results between different online marketing channels. We can also establish periodic checks over time to see if the results of our actions are generally improving or getting worse.

And finally, we should not forget that no matter how important ROI is, ROI is’nt everything. On many occasions, our marketing seek more "intangible" benefits that can be difficult to monetize, such as brand and product visibility. So before dismissing an action, think long term, and ask yourself what returns  or benefits can arise within your overall marketing plan.

5 Ideas to optimize your ROI

  1. Improve your landing. As you probably already have guessed, ROI is closely linked to conversions. Improving your conversion ratio for a given action amounts to improving this metric automatically. And one of the simplest and fastest ways to get this is through giving a good look at your landing page. Make sure they have all the necessary elements (and eliminate all distractions from the main navigation), that the UX is intuitive and that the design is appealing to your target.
  2. Use tests A /B. If you don’t know if something works or not, try! The A / B tests  are a useful tool to optimize each element of your marketing strategy. To try it out, release two versions of a content or an action that differ by a single variable (eg, a CTA button versions red or blue) and compare the results of each.
  3. Ask clients to identify gaps in your marketing. Sometimes having too much contact with your brand on a daily basis, leads to us only seeing trees as opposed to the full forest. There may be things you're overlooking, but are critical to your customers and could help you improve results. And the best way to know what you may or may not be missing, is through asking.  Today you have many digital channels to contact customers so there's no excuse!
  4. Take shortcuts when necessary. Time, whether it’s yours or your employees, is a resource that must be considered a valuable resource. To take a simple example, if you're paying a contractor 15 euros an hour, and the project takes 10 hours, you're investing 150 euros. If there’s a tool that can reduce that time to 2 hours and costs 30 euros per month, it is certainly a good investment. So do not forget to consider the "cost of time" in your ROI calculations.

Be sure to measure and optimize. ROI is a metric that can help you improve your marketing every day, but requires constant effort. Implement regular checks and see how the results are worth it.

 

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