About ROI — Return On Investment
ROI is the indicator that lets you know how much money the company is making or losing with each investment made. Good examples are: marketing campaigns, sales training, acquisition of management tools, new customer retention strategies, etc. It is visible the investments that are worthwhile, as well as the optimization of those that are already working.
Tracking ROI is important as it provides the direction from which to look for detailed information to answer a few questions:
- What are the company’s biggest sources of profit?
- What are the most effective communication channels?
- Is Marketing Campaign Performance as expected?
- Has the sales process been efficient?
- Is customer service contributing to customer loyalty or is it lacking?
It’s no use expecting to find detailed information just by looking at the payback period, but it will give you a direction of where to look. Using other important indicators, you can delve deeper into the points that need improvement.
The simplest way to calculate ROI is by following this formula:
The formula can analyze the business as a whole or evaluate a project individually. This identifies problems in any part of the business.
Result is a percentage, making it easy to compare the ROI of different actions or strategies.
Revenue: It is all the collection of the company on account of the sale.
When calculating the ROI of an area or campaign you should use only the amount raised by the chosen segment. (E-commerce platform, revenue should represent sales for this channel, not the store as a whole.)
Costs: These are all expenses that allow the viability of the investment.
In the e-commerce platform, these are costs represented by the amount paid to use the platform, the hosting price of the website, the investments in paid ads, expenses with internet, telephone and whatever else is needed.
How to rate your results
Assuming the company as a whole received $ 70,000 in sales and $ 25,000 came from the online store. To maintain the site you spend $ 5,000 while the physical store needs $ 15,000.
E-commerce ROI:
ROI = (25,000–5,000) / 5,000 x 100
ROI = 20,000 / 5,000 x 100
ROI = 400%
Has 400% return, for every $ 1.00 invested, you get $ 4.00 profit.
ROI Physical Store:
ROI = (45,000–15,000) /15,000 x 100
ROI = 30,000 / 15,000 x 100
ROI = 200%
The result is variable and depends on the action taken, the quality of the planning, the execution among other factors.
With ROI you can analyze:
- What was done or not done that may have influenced this result?
- Is there any relationship between high return investments?
- What do high-ROI actions have that can be replicated in others?
- Do your campaigns return similarly to my competitors?
- Does your company have better results than others in the industry?
Remember that the ROI result can also be negative. In this case it means that the investment made the company lose money. But this information allows the company to investigate the problem and make the necessary changes.
ROI limitations
Does the calculation have limitations, for example, is a 5% ROI good or bad?
This depends on the factors involved, as the ROI does not consider the duration of the investment, ie if it is a short term investment with a ROI of 5% per day is a positive result. But if the investment is long term (one year) is no longer good news.
The ROI does not consider value fluctuations due to inflation, ie the 5% per annum return would be quickly dissolved by rising inflation, taxes, tariffs and other banking issues.
Another limitation is that its results do not take into account the seasonality, if analyzing a medium to long term investment, can get a positive result. In fact, depending on the investment in question, this number may have been influenced by some occasion and mask the negative results of certain periods.
To avoid misconception of ROI, it is important to make sure you know the origin of the numbers used and to ensure that all calculations use the same pattern.
Conclusion
ROI is a metric tool that makes it possible to accurately know the efficiency of your investments, gains and losses, helping to confirm or change the strategy if necessary.
