Money makes money, but that doesn’t always have to be true. You may have already begun to figure out how to calculate your return on marketing investment, but you’re getting a little lost in it. In this article, we will look at what the term return on investment means, what to include in it and how to calculate it. We will also clarify definitions of ROI, p.a. or benchmarking.
ROI stands for Return on Investment. It is one of the basic indicators that expresses net profit or loss in a percentage and can be applied to basically anything – from a new advertising campaign and market research to customer acquisition.
3 reasons why you should know your return on investment
We think the answer to this question is perhaps self-evident. But if you are one of those people who are not exactly enthusiasts in analytics, we will remind you of three reasons why you should start:
1. You figure out what you can afford
Even if you can afford it, when you plan to run basically anything that will cost you something, it’s a good idea to calculate in advance whether it will be profitable or not.
2. You have an overview of your returns within your portfolio
If you regularly check how your investments are doing, you have the opportunity to work with them more efficiently. The ideal is a year-on-year comparison, in which you can find out what marketing is worth investing in and what isn’t. Based on this, you can optimize your activities and achieve better results at a lower cost.
In this calculation, you will work with a percentage value p.a. It is an abbreviation of the Latin per annum or per year. You can most often see this abbreviation in the finance field, but you will also use it in marketing.
You can then determine your next direction based on a year-on-year or quarterly comparison. For example, you’ll find that in your case, it doesn’t make sense to spend so much on social media marketing, but PPC advertising is paying off. Or, for example, you calculate that each pound invested in virtual assistance ends up making you three pounds, so you decide to invest even more in this area. Simply put – you make an informed decision based on real facts and figures.
3. You will be in the picture and you will not be susceptible to fraud
Surely it has happened to you that you received a marketing email with a seemingly tempting offer. Most often, various “salesmen” offer guaranteed advice on getting a return of 20% or even 40% p.a. If you know enough about ROI beforehand, you will likely send this email straight to spam where it belongs.
A relatively simple formula is used to calculate ROI, where you subtract the initial investment from the net profit, divide by the initial investment and then multiply that by one hundred:
Example: You sell paintings, you have a net profit of £100 from each. To promote your images, you’ve launched a £1 PPC ad. On average, 5% of customers who click on the ad will buy them. This means that you sell the image to every 20th visitor – so to sell one image, you need 20 people to click on the ad. The resulting investment in PPC advertising for the sale of one painting is £20. The formula will then look like this:
So your return on investment in this case is 400%, you’re doing great!
Benchmarking is one of the tools of strategic marketing which uses comparison of criteria – return on investment, company performance or, for example, product sales. With the help of benchmarking, you can compare your return on investment with the competition or compare ROI in your own company between individual sectors.
A few final tips
- The best tool for calculating ROI is Excel or Google Sheets. You can keep all your calculations in one spot and always at hand.
- Always enter values in the same currency, and also pay attention to the same tax rate (with VAT and without VAT can create a nice mess in your calculation).
- Include all costs. A one-time investment in stocks, for example, is a bit easier than a marketing campaign, where you have to consider all costs, including time spent, electricity costs, graphic design work, and so on.
Tip: Learn about online marketing and how it works.
Are you still unsure how to create a campaign that will be profitable?
If you find it all too complicated, you are not exactly the type for formulas or you don’t understand Excel, we can help you. We will help you create a marketing campaign so that it is profitable, and at the same time we will take care of its optimization. This will save you time and money.