What is ROI and why you need it?

Posted by Andres Aguerrevere on

What is ROI and why you need it?

The Return on Investment, also known as ROI is a very useful term in finances. As defined in a post by Entrepreneur Staff , the ROI is: "A profitability measure that evaluates the performance of a business by dividing net profit by net worth".

Every time an enterprise creates a new project, it means an investment too; not only of time, efforts and resources but also money. Having a credible number of the profit a project is giving back is extremely important.

It happens in almost every area that needs investment and gets profits; it occurs in the same way in Marketing. Moreover, this term has short time story being used in marketing matters.

Years ago, all the methods to prove the impact or effectiveness of a project and/or technique were based on metrics. Yet, marketers needed something more trustable, something with quant-based proof, deeper than views and likes.

Based on this need, ROI term became more important and used day by day in the marketing area. ROI use meant a brand new way to obtain numbers and measures; this is how a new term appeared, the MROI (Marketing ROI) as a form of getting results more meaningful and easy to understand.

As stated by Chris Leone, the president of Web Strategies "When someone asks you, is your marketing working? What do you think they're really asking? Are they asking if it's generating awareness, generating foot traffic, or generating sales?"

An acute form to answer those questions is by ROI in order to know if the marketing strategy is generating business in a profitable way.

After all, that is the main purpose of marketing and matters such as awareness and traffic are steps to achieve the goal, not the goal indeed.

Once it is clear that ROI means the amount of money any investor in a business receives for the input of financial capital, it is good to know the formula to calculate ROI.

 ROI's Formula

There are more than one forms of the determine of ROI. Moreover, there is one method used frequently; it works subtracting the ‘cost of the investment' from the ‘total gain on the investment' and dividing that by the ‘cost of investment'.

ROI= Total income – total investment

                  Total Investment

Others form to calculate ROI

ROI formula can involve several other matters such as capital, inventory, equipment, taxes and so on. There are three others forms to use the Return on investment inside of a business.

  • Divide the net income, taxes, interest by the total amount of liabilities. It brings a result the rate of earnings of the total capital employed.
  • Dividing net income and taxes by proprietary equity and fixed liabilities; this process equals the rate of earnings on the capital invested.
  • Dividing net income received by total capital plus reserves helps to get the rate of earnings on proprietary and stock equity.

A good MROI

Experts such as Chris Leone, in his article What Is A Good Marketing ROI? He explains that a 5:1 proportion is considered as a good ratio, located in the middle of the bell.

This proportion is generated for every dollar spent in marketing versus every dollar of income as a result of invested money. For example, that proportion of 5:1 means $5 received from each $1 spent.

Leone adds that number is probably good for a big amount of businesses, yet it will directly depend on the goal of each company. 10:1 is exceptional however it should not be the expected result.

Moreover, it is important to know that there is not a specific number set as a rule. Each company is a particular world, even within the same organization, different projects will result in different ROI percentages and it does not exactly mean that one is more successful than another one.

Three possible scenarios

As explained in a recent called  "ROI Formula and use",  there are three possible cases that come as a result of the ROI application, they are the best, normal and worst case.

Best Scenario:

  • It happens when ROI is measured and tracked among all the marketing investments of a business.
  • The result of all the campaigns are the best income possible, creating the highest return and the marketer is able to keep improving the results in further investments.
  • The organization is satisfied with the results obtained and with the decisions that were taken as they are strongly supported by the data

Neutral Scenario:

  • ROI calculation is made upon some investments, maybe the marketer is not completely familiarized with the process and it can get complex to understand. As the process takes time, maybe does not attempt to measure it at all times.
  • The marketer has a general idea of how the investments should perform relatively; it is seen as an estimated result around one and another project. However, the person is not capable of having the exact return of what the project is truly generating. Based on this lack of information or work, the budget may get cut in times of difficulty.

Worst Scenario:

  • ROI is rarely done, barely taken into account in any of the business investments.
  • It creates an atmosphere wherein marketing matters are seen as a total cost for the enterprise, specialist do not think the marketing acts can bring benefits to the organization
  • The company enters in a confusion state, as the results are not clear at all, it is hard to determine which campaign or strategy is actually working or which one is not doing a good role.
  • This type of confusion brings several negative effects to the company and can add troubles when aiming to achieve goals.

Once you have the number, what to do?

All the process is done, the ROI is calculated and you have received the final number or percentage, yet what is the next step? Which action should you take and how will it affect your next investments?

Every result is useful and important, even when the percentage you received was not the expected one. That number will help you to take further decisions.

The ROI result is an excellent measure to decide where to put your money next time. In case you are satisfied with the result of your marketing investment and the ROI affirms you did a good job, picking the same strategy can work well and even get better.

If the outcome was not the expected one, it is a clear sign to look for another strategy, campaign or place where to invest your marketing budget. It is also helpful to analyze all the possible reasons why the outcome was not good enough.

There are external factors that can affect both positively and negatively the market and, as a consequence, marketing too.

 Helpful platforms

It is known that calculating ROI is a long-term project; yes, is very helpful and for some experts, it is something necessary and not just something a marketer decide to do or not to do.

Moreover, doing this process takes time and effort and everyone must admit that time and effort means money in business.

Even when it is not easy to calculate the net revenue that all the marketing activity can generate to an organization, there are certain methods that may help to make the process lighter.

Some of those techniques are social media, content marketing, visual content (videos, streaming, infographics), and ads are part of the marketing process, it is consumed by every potential customer before the purchase of any product.

Among other useful tricks, software platforms are acute ones. For Marketing, systems such as Hubspot, Marketo, and Pardot do an excellent role when connecting early engagement to a final sale; nevertheless, it is completely necessary to clarify that these are tools that are not 100 percent perfect; they must be used as a guide but not as the final word.

In the same way, the marketer keeps being the first option. In this area, the computer has not beaten human yet they both can work together in order to obtain better results. That being said, marketers should always work to connect the dots between activity and revenue; in addition, the advances in web analytics software and methodology provide better insight for measuring activity over time and across different devices.

The term ROI has less than two decades of existence; in this short time has brought many interesting results to business, no matter how small or big they are.

It is true that ROI can be complex as many factors have a direct and indirect influence on it.

Moreover, the study of this matter and the improvement of its use in further campaigns can and will generate more profits for businesses.

An incredibly important fact about this wonderful world of Return on Investment in marketing matters is the fact that not every organization considered vital in these days, which lead them to work blindly.

The use of ROI in marketing is an excellent tool, even though it cannot measure without making mistakes, having an estimated percentage of how much money you are putting and how much you are receiving –among many other factors- is absolutely much better than working without considering it at all.

As promised, here you have a silly joke...

What's a pirate's favorite thing about marketing?
The arrrrrrROI


Older Post Newer Post