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Return on Investment (ROI): what it is, how to calculate it and its advantages

Return on Investment (ROI): what it is, how to calculate it and benefits

You cannot measure the success of your digital marketing strategy without understanding what ROI is.

The acronym stands for Return on Investment.

ROI is knowledge that must be applied in your dissemination actions and reinforcement of authority on the web.

As you are going to see in this article, it is a metric that allows you to identify the cost-benefit relationship of each of your strategies.

And surely, you do not want to invest a high value in something that does not offer you a return, does not generate leads, or conversions. True?

But it is not enough to know what ROI means, even if you understand its importance.

You need to understand how to apply the ROI formula, a calculation that does not require advanced math skills.

The important thing is to know that its result is a determining factor in your campaigns.

So you want to learn how to do ROI analysis?

Come with me!

What is ROI?what is ROI

From English, Return on Investment, ROI is a metric that indicates the return obtained on a certain investment.

By applying a mathematical formula, it is possible to identify the relationship between what was spent and how that outlay translated into benefits.

ROI is not an exclusive tool of digital marketing, but it has everything to do with it. The moment you use that calculation, you will be able to discover the relationship between the invested value and the value obtained in each action.

And take a good look, when we talk about actions via the internet, we are referring to your outreach campaigns, audience attraction, lead generation and reinforcement of your brand and authority.

What is it for?what is it for

Let’s imagine that you have understood what ROI is for, but we will make everything even clearer so that there is no doubt.

And for that, exemplifying always helps.

Let’s say you want to invest in paid media on three different channels: Google, Ad words, Facebook Ads, and LinkedIn Ads.

So, hypothetically speaking, you applied the same value to promote / boost your ads on all three platforms.

It would be super interesting to know in which of them your money was better applied, correct?

Well, it is just what the ROI answers.

By using its basic formula, you will know which channel is more effective , which one generated more leads, which one seems to be of little use and if this last piece of information is a standard or if it is an isolated episode.

See how ROI is important for your digital strategy.

What’s more, the relevance of the tool deserves separate comments. So stay tuned to see what’s next in the next topic.

Why is ROI important?Why is ROI important?

ROI offers the answers you need to continue, reinforce, adapt, correct, replace, cancel or take any other action related to your internet marketing campaigns.

That is precisely the role of existing metrics to measure the results of your digital strategies.

Like others, ROI reveals whether your action achieved the desired success.

More than that: from what it exposes, you can reinforce your investment to increase the results of the campaign, or, in the opposite sense, reduce the contribution of resources in something that is inefficient.

A metric is a way to monitor and measure results.

And to answer what a metric like ROI should have, we are going to base ourselves on the three basic criteria chosen as the main ones by Piddle Macedon, Emerson Silva and Monika Fritos:

  • Simplicity: must be understandable to everyone
  • Relevance: must add value to the user
  • Ease of obtaining: it must result from a simple calculation, with immediate identification.

By understanding what ROI is, you realize that it perfectly fits the three previous conditions.

And to broaden your understanding, think about what it would be like to invest in your digital marketing strategy in the dark, without being able to measure its return.

Without the ROI, how then to identify the results of that publication that you promoted on Facebook because a colleague told you that there you would find a gold mine?

How are you going to know if you proceeded correctly in your email marketing and if it revealed an action to match, in relation to what you invested?

And how is the ROI left in the case of practices that demand other resources, in addition to money, such as your own time or that of your team?

What about content, e-book and landing page marketing?

Have you applied your financial and human resources well in the marketing campaigns you launch?

Definitely, more than understanding what ROI is, you must learn to calculate it.

And it is about that matter that we are going to talk right away.

How to calculate ROI?how to calculate ROI

To calculate the ROI, you must apply a simple mathematical formula that considers the value invested in the action (that is, the cost) and the turnover or performance that was obtained (the financial return).

By having those two factors, you can use ROI to measure the result of any strategy.

Once the numbers of the expenses and profits of the campaign have been identified, you will have to subtract the value of the performance or billing, then divide by the same cost and multiply by 100.

From that calculation, the percentage will result. This will be your ROI.

It is a basic formula, easy to use and that applies to all your digital marketing actions.

As we highlighted before, it is necessary that you have a precise answer about the expenses and returns of each campaign.

What are returns?

It may seem very easy to answer that question, but you need to be careful not to get confused, especially if you work with simultaneous actions in your strategy on the web.

As already mentioned, each campaign has its own ROI.

You can even calculate the comprehensive ROI of your digital marketing strategy, but it is important to evaluate the actions individually.

And for that, the first move is to identify how much you received for each of them.

But it is important to work with measurable data.

In other words, the returns are equal to the value that came into the box from your marketing action.

For example, a Google Ad words campaign generated conversions, leads, and $ 500 in sales. Those are the returns you should consider.

What is the cost?what is the cost

The same reasoning applied to returns is valid here.

As each campaign has its respective ROI, it takes into account the value invested individually.

Only then will you be able to achieve a reliable result.

So, in relation to costs, consider what you spent to promote a certain action.

Continuing with the example that I presented to you, the investment corresponds to the value applied to promote your campaign in Google Ad words.

Understood?

We can now use examples to see how the ROI is obtained.

ROI Examplesexamples

After you identify how much you spent and how much you received with your marketing action, you can go straight to the calculation.

I am going to explain to you with an example how the formula is applied.

Returning to the one I used before, about Google Ad words, we know that you received $ 500 dollars with the action.

Assuming your cost was $ 150 to promote it, the ROI has to be as follows:

Returns: $ 500

Expenses: $ 150

So the ROI will be:

ROI = 500 – 150 = 350 ÷ 150 = 2.33 x 100 = 233.33.

That is, you obtained an ROI of 233.33%

Is it bad or good? It depends.

We will already talk about how to evaluate the result, but to reinforce the concept, it is better to present yet another example.

Let’s imagine that your campaign is through YouTube.

To promote it, you had an expense that you considered high, it reached a total of $ 15,500.

At the end of the action, you did the calculations and identified that it returned returns with a total of $ 17,800.

Let’s go to ROI now?

ROI = 17,800 – 15,500 = 2,300 ÷ 15,500 = 0.15 x 100 = 15.

In other words, we have an ROI of 15% there.

Comparing with the previous ROI, this one was much lower.

Does this mean that it is a bad result? Not necessarily.

We will understand it better in the next topic.

How do you know if an ROI is high or low?How to know if an ROI is high or low

When talking about ROI analysis, you need to understand that the answer you are looking for does not exist.

This means that there is no magic number that separates good results from bad.

An ROI that seems high may in practice fall short of its true potential

On the other hand, a lower ROI, perhaps hides an index above the average for a certain type of campaign.

So is ROI analysis that subjective? If it is, why use that metric?

Let’s take it easy.

First of all, it is necessary to take into consideration the term of the campaign.

If the 233.33% return of the previous example was obtained over a year, so to speak, the result is below 15% of the ROI of the other campaign, in the case that this is the weekly return.

But the longer the term, the more returns obtained are subject to the influence of external factors, such as inflation.

Note that it works exactly the same way as a financial app.

Only that the comparison between the ROI of one campaign with another is sometimes unfair, especially when they have such different characteristics – in text or video – for example.

Expectations need to be made clear.

First of all, if you are going to compare, consider the actions carried out on the same platform or in very similar situations, such as promoting on Facebook and a promotion on LinkedIn.

As you proceed to measure the results of your marketing actions, you more easily identify when performance is below expectations.

If two similar campaigns get different results, you will soon know if one of them was oversized, or if the other was underestimated.

By understanding what ROI is and how to use calculation to your advantage, you clearly realize that practice leads to improvement.

The formula is simple, but its application and analysis requires knowledge and dedication.

In this article you are taking the first step. But you can go much further.

Before long, you will know when a high ROI really corresponds to what you want.

For the moment, to understand whether or not it is really worth it to dedicate yourself to calculating ROI, it is important to know your strengths and your limitations.

Let’s start with the advantages.

Advantages of calculating ROIAdvantages of calculating ROI

Among the main reasons to include ROI on the agenda of your digital marketing strategy, there are at least six advantages that deserve to be cited.

These are:

1. Reduce costs

Everything that you invest in marketing and that does not translate into practical results can or should be cut.

The problem is to do that without planning, and even more serious, without funding.

ROI guarantees you the information you need so much so that your campaign is not so expensive.

Of course, there is nothing wrong with spending on marketing.

The downside is not knowing how to spend. And that applies to everything, including marketing.

2. Optimize investments

This second advantage is a consequence of the first.

From the moment you can identify opportunities to reduce marketing expenses, which are unnecessary, you can apply resources more intelligently.

Optimizing investment is spending well.

And that has nothing to do with the value you use in the campaign, but with the return it generates.

3. Rate the strategy

After you optimize the investment in a certain campaign, you find a formula capable of being replicated to other digital marketing projects.

If you used to spend badly not Ad words and the ROI helped you change that panorama, you can do the same on Facebook, LinkedIn, YouTube and on all the platforms you use for the dissemination or reinforcement of the authority of the brand.

ROI allows you to find a scalable model, that is, it can be applied to other strategies.

4. Look long term

With ROI, one advantage leads to another.

One of the most interesting aspects of this metric is that, once incorporated into your marketing plan, it becomes a permanent instrument to obtain better results in your campaign.

It is not a perishable tool that is valid for a certain action and then disappears.

ROI allows the constant improvement of your digital strategy.

5. It brings you closer to goals

Surely you have already heard that goals are fundamental.

They define where you want to go, and thus, it is easier to decide how to reach them.

You must also have heard that if there is no way to measure, there is no way to manage.

Put all that together and you will see how the ROI contributes to getting to the place you set out for yourself.

Do you want to reach X number of leads? Invoice a value Y in sales?

O ROI can help you.

6. Motivate your teammotivate your team

To finish this topic on advantage, think about it.

How motivated are you and your team to have a clear goal and a real instrument to assess the path that leads to achieving it?

As the results improve – and the ROI actually allows that evolution – the greater the involvement of everyone.

And it goes without saying, but it doesn’t cost anything to remember that motivation is an important component of success.

Disadvantages of ROIROI downsides

ROI is not a foolproof formula. Nor is it possible to guarantee spectacular results from the use of this tool.

She has limitations that you can learn to avoid, or at least learn not to have prejudices in the strategy.

Let’s see what its disadvantages are.

1. By itself, ROI says nothing

ROI did not arise to be considered a magic solution in your internet marketing campaigns.

To be valid, it must be analyzed.

And for that, as we saw it, it is necessary to consider the characteristics of each action.

Sticking to a seemingly high ROI can mask the downside – which brings us to the second downside.

2. ROI can deceive you

According to the examples I showed you, the indicator itself can even lead to false results.

An ROI of 200% is not necessarily better than one of 10%.

That is why the isolated analysis of your result threatens your profits.

3. Long-term, double the care

And, suddenly, there came inflation and changes in economic indicators that completely altered the reality of a few months ago.

In that scenario, that ROI of 20% m is currently worth much less.

Take note that a long-term strategy needs even more attention when it comes to results.

A common mistake is to remain with the campaign untouchable for that period, without making the analysis and adjustments that it requires.

ConclusionConclution

There is a very clear lesson at the conclusion of this article.

In digital marketing, there are many details that directly or indirectly influence the success of a strategy.

By understanding what ROI is, all of that starts to make sense.

There are things that do not depend on you and can get out of control, therefore, there is no other way than to measure it.

You need to know what was the scope of an action, if the e-book aroused interest, if the landing page was well received and if your traffic ads generated LEDs.

If the opposite happens, you may end up investing in a solution that does not generate any return.