ROI Formula (Return on Investment). Learn the different ways to calculate Return on Investment
What is one of the main tasks of marketing?
1. Make a cool ad? — Not. What is the meaning of it if everyone talks about it, but nobody buys it.
2. Make inexpensive advertising? — Pass by again. Since it makes no sense to consider expensive advertising with you or not, if again there are no customers.
The answer is to make effective advertising. And for this you need to be able to consider this very efficiency. And for this we can use the formula for calculating ROI.
WHAT IS ROI or ROMI?
In short, ROI or ROMI is the rate of return on investment. In fact, it shows how successful your investments were.
Since this is a marketing blog, ROI is interesting to us in marketing. Accordingly, both the calculation example and the formula will be for marketing purposes.
But first, I would divide people into 3 types:
1. Those who have never heard what the coefficient is;
2. People who have heard, but do not believe, because they think it is useless;
3. Well, and those who believe him, thinking that this is the basis of business.
I will not go into details, criticize or defend this indicator. In fact, there are many disputes, as well as articles in defense of one position or another. But my opinion is that it is imperative to consider ROI in marketing.
After all, advertising, when used correctly (first of all, using the ROMI measurement), is a kind of printing press. The more you invest in it, the more money you type.
I really like the comparison in the article of this marketing indicator — “I’m changing $100 to $500”. It looks silly, but this is what you should see as a result.
ROI COEFFICIENT CALCULATION FORMULA
But here again there is a snag. What formula do we need to calculate ROI? What does a marketer need? Let’s look at a few examples, after which I will reveal to you the secret, how can you count this figure in 10 seconds without using a calculator and not even understanding the point.
Example 1 — Total Return on Investment
The first will be an example of return on investment (ROI). You have advertised your product on any advertising channel. For example, advertising on Facebook, or rather, an advertising post with famous personalities.
Now we will not go into how many there were and what the promise was. We take as a basis the fact of advertising on Facebook, as a result of which you received such figures:
Advertising investment — $180.
Investment income is $1145.
That is, you spent $180 on advertising, and people who came from this ad bought $1145 from you. We substitute these values into our formula and we get:
ROI = (1145 – 180) / 180 = 5.36 multiplied by 100% (ROI is considered to be a percentage)
The result of this channel according to the formula for calculating the ROI: 536%.
Well, very worthy! Very, very.
That is, you invested $1 in advertising, and received almost $5.4. Worthy result. Got it? Now let’s move on to more complex things.
Example 2 — return on investment, taking into account the cost
In the first example, you and I considered the profit ratio without taking into account the cost price of the goods, the most careful ones should have noticed and become indignant.
In this case, we will calculate ROMI exactly as it befits a professional, that is, taking into account the basic costs of manufacturing your product. This formula looks like this:
ROMI = (Gross Profit — Investment in Marketing) / Investment in Marketing
But, as usual, to better learn everything. We have a legend — we produce inflatable boats.
We sell boats for $3733.3;
The cost of these boats is $1,493.32;
We spent $224 on advertising in a magazine for fishermen and hunters;
We received 2 orders (I’ll tell you quite a good magazine!), Each of which purchased one boat.
To begin with, we calculate the gross (dirty) profit from the two boats sold.
Gross profit = gross revenue — cost of goods sold
Gross profit = (2 * $3,733.3) — (2 * $1,493.32) = $4,479.96.
And now let’s do the ROI calculation itself:
ROI = (Gross profit — investment in marketing) / Investment in marketing
ROI = (4479.96 -224) / 224 = 18.9 multiply by 100% => 1890%
This means that every dollar we spent on advertising in a magazine brought us $18.9 of clean money.
I have to say, this is a good example of investment and a similar magazine — a find for your niche and you need to increase the advertising budget for it.
Example 3 — expenditure to income index
And another formula, MRE (Marketing Expense to Revenue) is almost an analogue of ROMI, but already more for managers of the marketing department or for the business owner.
How to calculate how much you spend on marketing (I am talking not only about advertising, but also about paying specialists or marketers) in relation to the income received? Pretty simple.
Marketing expenditure-to-income index = Marketing costs over a period / Revenue over the same period
Remember our boats? The legend continues:
For 1 year we received an income of $223,998;
For the same period, advertising and marketing staff spent $29,866.4.
Marketing expense expenditure index = 29866.4 / 223 998
According to these results, this index is 0.13. More comfortable in percentage?
You are welcome! 13% of the income you spend on marketing.
We are not one of those who like to complicate things. I confess that we, like everyone else, love to be lazy rather than work. Therefore, we are always looking for simple solutions to reduce time costs.
The first and simplest solution is the built-in function for calculating the ROI in analytic s systems. Alas, in classic google.analytic s it is not possible to do this (without crutches).
But if you use more complex systems, which are called “End-to-End Analytics” and “CRM-systems”, then there it is done automatically for you. All you need is to fix the fact of sale.
But for those who love simpler and still use Excel for the most part (no offense), there are special services where in two or three clicks you get the result of your manipulations or frauds (depending on the result).
There are many free ROMI calculation services on the Internet. Everything as I love. There are certainly extra numbers, which is called “for those who understand,” but the basics are enough for you. What is called, “just add numbers”.
Life hacking! If you want to consider ROI professionally, then I strongly advise you to find a service where you can use the investment ROI calculator. Make calculations (and therefore make the right financial decisions). To make your results even faster and more efficient.
If you make the calculation of the ROI indicator for the first time, then the figures will most likely be taken from the head, supposedly. I think you will be shocked and disappointed in the effectiveness of advertising.
Most likely the numbers will turn out to be much lower than those you expect (too high odds are also a sign of suspicion).
But it’s good. Now you see the real picture of how your ad works. Your main task is to increase the return on investment to the maximum value of ROI. The main thing to remember is to measure the profitability of your investments. Otherwise, why do business?