Why you need ROI and how to measure it

Even if you're far from analytics, you've probably heard of ROI. Without tracking this indicator, the chance of losing money on an unsuccessful advertising campaign or investing in an obviously unprofitable startup increases many times over. With the help of ROI you can evaluate the profitability of any monetary investment and understand how effective your strategy is.

And now in simple words: what is ROI?

ROI or Return On Investment is a measure of return on investment. For example, you invested a certain amount of money in advertising and production of your product. After a month, you evaluate the level of profit received. By calculating the ROI, you can see the return on your investment. For example, if the ROI is 600%, for every hryvnia invested, you earned 6. The classic formula for calculating ROI looks like this:

ROI = (Return on investment - size of investment) / Size of investment * 100%

From the income we subtract the expenses and get the net profit, i.e. the money we actually earned. The ratio of profit to investment shows how many times what we earned is more than what we invested. For convenience, the indicator is measured in per cent. 

Examples of ROI calculation 

Let's say you launched a Google Ads campaign with a holiday offer. In a fortnight, you sold 32 product items, which in total brought you UAH 52,152. The total cost of the advertising campaign and production, including salaries of specialists and traffic purchase, for this period was 24,621 hryvnias.

ROI can be calculated for any direction of the company, on which the revenue depends. For example, let's calculate ROI for the sales department. Managers receiving calls processed 100 requests during the month. Each of them cost 181 hryvnias. Then the revenue will be 18,104 hryvnias. Expenses for their salaries and necessary equipment cost us 9,414 hryvnias.

ROI = (50 000 - 26 000) / 26 000 * 26 000 * 100% = 92% 

The indicator 92% means that we do not fully recover our investments. What can be done in this situation? Let's talk about it further. 

How to calculate ROI in marketing?

ROMI is more commonly used in marketing. In fact, it is the same indicator as ROI, but here we are talking specifically about investments in marketing. ROMI is usually calculated without cost of sales. We subtract marketing expenses from revenue and again divide the resulting number by our expenses.

The ROMI formula looks like this: 

How to calculate ROI in advertising?

Another similar indicator is ROAS. It shows the profitability of advertising costs, which means that it can be used to evaluate the effectiveness of even one specific advert. Formula for calculating ROAS: 

The main purpose of this indicator is to find out whether you are making a profit from using specific advertising tools. The difference between ROI and ROAS is that the ROAS calculation does not take into account all the costs of production and promotion. ROAS may seem useless at first glance, but sometimes there just isn't enough data to calculate ROI. For example, you don't know the cost of goods. Then you can just guess at what ROAS value the investment will pay off or at least go to zero. This is better than acting blindly.

What ROI is considered normal?

Now that we know what ROI is, it is logical to assume that the higher the ROI, the better. But what kind of ROI is considered good? It's impossible to say unequivocally. It all depends on the sphere and your goals. It is only important to know that: ROI greater than 100% says that you have returned every hryvnia invested and are making a profit. ROI of 100% is the break-even point. It means that you have earned exactly as much as you invested. But you do not get profit. ROI less than 100% but greater than zero means that only part of the investment is returned. We recommend that you constantly monitor the indicator and compare it with previous periods. This way you will be able to see which of your actions led to positive dynamics and which ones worsened the situation. 

How to increase ROI?

It is logical to assume that to increase ROI we need to either increase revenue or reduce expenses. How to do this. Don't put all your eggs in one basket. Use different ways to attract traffic, monitor the effectiveness of channels and reallocate your advertising budget. There's nothing worse than finding out at the end of the month that your Instagram advertising campaign was a failure, and you didn't use any other channels to attract the audience. Be sure to conduct testing. Which of the two ad options will attract potential customers more? Why guess when you can try both and see for sure. Increase your average check. You've already spent money to attract a customer. So, you can try to increase your revenue from interacting with him. Remind them about you, offer additional products and bonuses on future purchases.

Conclusion
ROI, ROMI and ROAS are important, but not the only indicators for assessing performance. In our projects, we always use not only them, but also take a broader view of the situation. Of course, numbers will never answer the question, "What went wrong?". But sometimes it's still useful to quickly assess the metrics and see if you're heading in the right direction.