Return on Investment (ROI)

Return on Investment (ROI) is a marketing metric used to assess the profitability of a specific investment. This indicator helps calculate the gain from an investment based on incurred costs. By estimating ROI, you can adjust your strategy and improve your business's efficiency.

This article will explain why ROI is important and how to calculate it in digital marketing. We’ll also provide details of ROI analysis and tips for increasing your business's return on investment.

Why is ROI important to your business?

ROI is essential for your business because it helps evaluate the performance of your company and the revenue it brings. The metric assesses the efficiency of an investment by measuring its financial return relative to the expenses made. As a result, company owners can identify which investments bring returns and which don’t. There are even more reasons to consider calculating return on investment.

ROI enables all business teams to make well-thought-out decisions. Companies can effectively decide how to allocate their resources. They can focus on projects that bring the highest returns and avoid unsuccessful investments. Business owners can also compare their ROI with industry benchmarks and find out whether their companies perform well among competitors.

ROI calculations help make the right decisions regarding financial planning and budgeting. When estimating the return on investment, businesses can determine high-revenue investments and allocate more financial resources to projects that bring real value to their companies.

Besides, the metric allows company owners to align investment with the main objectives, optimize market positioning, identify risks before they become real problems, and focus on innovative projects. This results in more investors eager to become part of a project.

There are various reasons why businesses calculate ROI, and we’ve covered the main ones for you to consider. To figure out how good your return on investment is, you need to have a clear understanding of it. We’ll uncover it in the next section.

What is a good ROI?

ROI varies depending on the industry. We’ll unveil the most popular areas to consider and pay close attention to.

Generally, a good return on investment is to generate a minimum of one dollar for every dollar a company spends during a marketing campaign. However, it differs based on numerous factors, including industry, communication channels, and marketing strategies. A positive ROI is usually a good ROI when talking about all industries. However, a strong ROI should be around 10% or more to show that a business makes good gains from its investments.

Let’s also review the return on investment associated with different industries. According to CSIMarket's research, companies involved in services usually get an ROI of 10.31%. Those in the technology sector often have a return on investment of 5.56%, while companies in the transportation sector have a slightly higher ROI of 6.40%. Businesses in utilities receive a return on investment that fluctuates around 4.71 %. For those companies related to healthcare, it’s good to have a return on investment of 3.42%, while finance businesses will have around 0.73 %.

Now that you know the ROI, which is considered good based on their sector, it’s time to find out what the highest ROI companies achieve through effective resource allocation and strong sales.

What is the highest ROI?

Besides finding out what a good ROI is, you should also know how high your returns need to be to outperform competitors and see real results from your business. We’ll uncover some of the highest ROI you can have after investing in various industries.

The first is real estate, which can provide a 10% ROI or even higher if you do everything effectively. When investing in such a business, you can avoid inflation and have a constant cash flow. Buying property and renting it to people can be highly profitable and give you high returns.

Lawyers, dentists, accountants, and employment service companies are some other sectors that bring the highest returns. Healthcare businesses, food services, and advertising firms are also on the list of top investments that bring the best returns.

Now that you know what industries are the best for making investments, it’s time to figure out how you can calculate ROI in digital marketing for your business.

How to calculate ROI in digital marketing?

Estimating return on investment in digital marketing is an essential and time-consuming process for every business. To do it right, you need to follow our step-by-step guide, which you can find below.

You can estimate your ROI using the following formula:

ROI = (Net Profit / Investment) x 100

To calculate the measure, you need to identify the following indicators:

• Net Profit is the total return from the investment with initial costs substituted;
• Investment is the total amount of money you invest.

To estimate the net profit, you can use the following formula:

Net Profit = Total Revenue −Total Expenses

To clearly understand how to calculate ROI in digital marketing, you should see how to apply formulas in real life with numbers, so let’s check the examples below.

Imagine that you want to estimate ROI for your new email campaign. For example, you have a skincare company, and you invested in this campaign $500, and after a year, you managed to get $800. The net profit using these numbers will be $300. It’s time to calculate ROI for this scenario:

ROI = ($300 / $500) x 100 = 60%

Your ROI would be 60%.

Let’s say your company has launched a new product, but your landing page and social media networks don’t generate many sign-ups and conversions. So, you decide to run a video ad using YouTube. Suppose you spent $800 on ad development and YouTube advertising. In six months, you earn $1200, and your net profit is $400. Let’s find out how good your ROI is.

ROI = ($400 / $800) x 100 = 50%.

In this scenario, your ROI would be 50%.

You need to do an ROI analysis to make all the calculations and interpret the results correctly. In the next section, we’ll learn what ROI analysis is and how to implement it accurately to get proper results.

ROI Analysis

Besides estimating ROI, you should also know what ROI analysis is and how to do it. This section will explain this and more.

ROI analysis is the process of evaluating the efficiency or profitability of a specific investment. After conducting a return on investment analysis, companies determine the financial returns generated from a specific investment. It can be used in various areas and for different business purposes. Business owners usually use it to assess the effectiveness and profitability of online ads, social media campaigns, email marketing, SEO, traditional advertising, trade shows, conferences, and promotional events. With ROI analysis, entrepreneurs can evaluate how profitable new product launches and improvements can be.

ROI analysis contributes to the choice of the right operations and efficiency projects. These include investments in automation tools, marketing platforms, new software, and technology to boost productivity. Besides, with its help, companies calculate the effectiveness of employee training programs, recruitment campaigns, and educational initiatives.

Once you decide to implement ROI analysis, there are pros and cons you should consider before doing it. Let’s start with the perks:

• straightforward formula;
• qualitative assessment of investment;
• well-informed decision-making process;
• well-thought-out financial planning;
• clear investment justification;
• performance accountability.

The disadvantages of return of investment calculations include:

• focus on immediate returns without long-term opportunities;
• static analysis;
• non-financial factors excluded;
• possibility of misleading results;
• might not cover hidden costs.

Now that you know about the pros and cons of ROI analysis, let’s find out how to conduct it step by step.

1. Determine a clear purpose for the analysis. ROI analysis can serve various objectives, so it’s important to identify specific and accurate goals for your business. For instance, you can calculate it for your new marketing campaign, product launch, technology, or special platform. By estimating the return on investment, you can assess the effectiveness of your investment and the profit it will generate.
2. Calculate all the financial expenses. Identify all the costs associated with the new implementations. These include upfront expenses like installation fees, initial marketing costs, and training; recurring expenses like operational costs, employees, utilities, and subscription fees; and indirect costs associated with administrative processes.
3. Assess returns. Forecast the financial gains from your investment. Additionally, non-monetary benefits from the investment should be considered, such as enhanced brand reputation, improved customer satisfaction, and increased employee morale.
4. Estimate net profit. Use a general net profit formula to calculate the value. You can do it by subtracting total costs from total returns.
5. Calculate ROI. Apply the formula provided above to estimate the return on investment for your business. Refer to our example to make accurate calculations for your company.
6. Conduct sensitivity analysis. This step is necessary to understand how factors like sales growth rate and cost of materials influence your ROI. By performing this analysis, you can determine how strong your ROI is when influenced by various conditions.
7. Interpret results. Find out whether you have a positive or negative ROI and make decisions based on this information. You can explore industry benchmarks to understand your return on investment compared to competitors in the same niche. This data can help you decide if additional investments are needed to stand out and outperform the competition.

Now that you know how to conduct ROI analysis, it’s time to explore some tips on increasing ROI. These tips can be particularly helpful if your estimated ROI is lower than expected.

How to increase ROI?

There are a lot of strategies companies use to improve their ROI, but nobody can guarantee success. That’s why, in this section, we’ve listed the most powerful tips proven to deliver real results.

1. Identify goals and key metrics. To create an effective marketing strategy that brings good ROI, you need to determine your main business objectives. They should be accurate, measurable, attainable, and timely. By defining key metrics, you can track your progress toward achieving your goals and maximizing ROI. These indicators will also help you identify the tactics needed to boost your ROI.
2. Improve your advertising campaigns. Low ROI can indicate poor performance in advertising campaigns or overall product promotion. You should monitor your campaigns and metrics, which will help you assess their effectiveness. Once you identify issues, it’s necessary to solve them promptly.
3. Consider using additional communication channels. When aiming to improve ROI, integrate multiple communication channels into your marketing strategy. Identify channels that effectively convey your message and are popular among your target audience. Your ROI is influenced by the channels and content formats you choose to promote your product effectively.
4. Leverage A/B testing. Enhancing your marketing campaigns involves testing different variations, which is streamlined through A/B testing. This method allows you to compare two campaign versions—different email subject lines, images, and CTAs — and determine which resonates best with your audience.
5. Conduct surveys. After customers purchase your products, consider sending them emails asking for feedback. You can create surveys containing questions regarding your brand’s strengths and weaknesses. Also, you should ask clients about the main challenges they had with your company or product. This way, you’ll be able to identify issues that prevent clients from coming back or prospects to buy from you. Knowing your strong sides will help you find out what you do right and move in the right direction.
6. Use automation. By automating everyday processes, you’ll be able to prevent human error, send personalized campaigns at the right time, and reduce the workload on your team. The platforms enabling you to automate repetitive tasks usually have analytics tools helping you track and assess the success of your campaigns. Services like SendPulse have all the necessary features and analytics to run campaigns on various channels, including email, chatbots, web push notifications, pop-ups, and more.
7. Review your pricing structure. Consider optimizing your pricing based on the value you provide to your customers. When optimizing your pricing strategy, consider factors such as demand, seasonality, and market conditions. You can also implement discounts to attract new clients.

Congrats! Now you know what return on investment is and why it’s essential to track it for every business. We hope that our tips will help you improve your return on investment.

Last Updated: 18.07.2024