You may have heard the term ‘ROI’ a lot in business talks and marketing. If you are a marketer, you should know what it is. It is widely used in businesses for figuring out the effectiveness of marketing strategies.
Through this blog, you will get to know more about the importance of ROI and the steps on how to calculate it.
Table of Contents
- What is ROI in Marketing?
- Why is There a Need for ROI?
- What is High ROI?
- Some Factors Affecting ROI
- How to Increase ROI?
- What are the Benefits of ROI?
- What is the Limitation of ROI?
- Frequently Asked Questions
What is ROI in Marketing?
In business, it’s necessary to focus on the money you invested and the profit you achieved. So, in order to evaluate that, marketing experts use ROI as a measuring tool. ROI is considered the ratio between the net income and investment of the company.
The formula of ROI= (Net profit/ Cost of Investment) x 100
It is a marketing practice that relates revenue growth with marketing initiatives. As a financial indicator of success, ROI tracks the performance of marketing campaigns. It focuses on various tactics which can lead to the growth of the company. Through these metrics, you can easily plan your strategies and budgets.
Even though ROI in marketing can be calculated, it will not be the same for calculating the overall ROI. The total revenue of the company cannot be attributed to marketing activities. It will be difficult to calculate the ROI so it is necessary to be aware of the marketing analytics of campaigns.
Why is There a Need for ROI?
As we discussed before, ROI is an efficient tool used to compare different investments and their profits. It will help you focus more on investments that provide high ROI and change strategies for investments that provide low ROI. In this way, ROI calculations can be also used for making decisions for future projects.
In addition to these, it also focuses on long-term benefits and aspects such as brand awareness, customer satisfaction, etc. So, ROI is a key performance indicator that gives a better understanding of the company’s growth and sales.
If you want to know more about the importance of ROI, visit this blog – Importance of ROI
What is High ROI?
High ROI is considered as the gains of investments favorable to the cost. When a company is successful in converting the investments to profit, you can consider it a high ROI. So, most investors search for companies considering the ROI.
Basically, 7% is considered a good ROI for a business.
Even though high ROI mainly depends on the investments of the company, there are many other factors to be considered.
Some Factors Affecting ROI
Market share – Market share is all about the percentage of total sales by a specific company. If the market share is high, it can also increase the ROI.
Inorganic Growth – Inorganic Growth is all about sales expansion. Inorganic growth can lead the company to new markets through various acquisitions. It focuses on opening companies in new locations or buying other businesses. So, you can easily improve your ROI by opening new markets and marketing to new locations.
Sales revenue- Sales Revenue is an important factor of ROI which can be calculated by analyzing the closed sales. Increasing sales and revenue will help in gaining net profits that will improve your return on investments.
How to Increase ROI?
Leveraging Data has a prominent role in improving ROI. The data can be used easily to understand the demands, interests, and needs of the customers. You can easily get ideas through segmentation, predictive analysis, surveys, etc. These data will help in analyzing customer behavior and creating strategies accordingly.
Through this process, you can easily define your target audience and make better decisions.
Focus on Marketing Analytics
Marketing analytics is a technology that helps in converting the data into marketing insights to determine the ROI. It is a math-based discipline that helps in increasing knowledge about marketing tactics. This can be further used for various marketing strategies.
The major goal of marketing analytics are as follows:
- It helps in measuring the performance of the strategies applied.
- It helps in determining plans across different channels.
Reduce Overhead Costs
Overhead costs are the expenses connected with a business that is not directly related to producing the product or services.
In order to improve the return on investment, you have to focus on your current financial situation. It is important to reduce the cost which does not provide any profit. Due to variations in customer behavior, some strategies lose reach and visibility.
Many companies spend a lot on digital advertising unnecessarily. Due to these digital transformations, the budget will be increased significantly. This can affect ROI negatively. To maintain ROI, you have to focus on overhead and reduce it.
Experiments and A/B Testing
Experiments have a great impact on ROI. You can try different experiment tactics for a short time to check the results on ROI. So, trying new experiments will help you to find different opportunities to grow your business.
A/B testing is a process of comparing and contrasting two strategies to monitor which one works better. Through this, you can increase your conversion rates and reduces bounce rate.
Learn more about A/B testing through A/B testing- Guide
You can also know more about improving ROI through – What is Marketing ROI?
What are the Benefits of ROI?
Knowing the basics and importance of ROI is not enough. You should be also aware of the benefits of ROI which will help you in putting more effort into strategies.
- Measuring Profitability
It is one of the simplest ways of measuring the profit of a company. ROI focuses on the performance and effectiveness of different marketing strategies across channels. It has a significant role in making better decisions in terms of capital assets and gaining maximum profits.
- Comparative Analysis
Based on capital investments and profits, ROI is effective in comparing various business units. It is also beneficial in comparing inter-firm comparisons. So, it is a measuring tool to compare competitors for gaining better marketing insights.
- Justifying Expenses
Are you worried about your expenses over marketing campaigns? ROI is a significant tool that provides the data of the investments. It also helps in understanding the profits according to the marketing strategies. You can easily plan your future budgets by measuring ROI. So, it helps the investor in saving time and money in marketing campaigns.
- Investment Decisions
As it is one of the simplest methods, ROI has a great role in comparing the high and low- performing investments. You can understand the benefits of investments in different investment opportunities. So, ROI helps a company to make decisions that will provide both organizational and divisional profit.
What is the Limitation of ROI?
Even though the ROI is very beneficial, there are some challenges in determining the ROI.
Some of those are as follows:
- Uncontrolled variables
In some cases, the company has to face variations in sales. In such situations, it’s hard to calculate the ROI and measure the performance of the marketing strategies.
- Multiple Touchpoints
Touchpoints are considered as the customer interaction towards all the companies. These touchpoints help in converting leads into customers. But sometimes it’s hard to understand the offline and online touchpoints. So, If you are unable to figure out the touchpoints, it will be hard to measure the performance of the campaigns.
- Outdated Attribution Models
Attributing models help in determining the touchpoints that a consumer encounters on their path to buying decision. Sometimes these attribution models may not include offline channels and external factors of ROI. So, outdated attribution models will affect the accuracy of ROI.
- Different Calculations
Some companies use different components to calculate ROI. For example, some companies use investment gain whereas others use gross margin instead of profit.
Frequently Asked Questions
What are some factors that affecting ROI?
1. Market Share
2. Inorganic Growth
3. Sales Revenue
What are the benefits of ROI?
1. Measuring Profitability
2. Comparative Analysis
3. Justifying Expenses
4. Investment Decisions
What are the limitations of ROI?
1. Uncontrolled variables
2. Multiple Touchpoints
3. Outdated Automated Models
4. Different Calculations
ROI is considered one of the most important factors in marketing to analyze the performance of different marketing strategies. It helps in maintaining business goals and making better decisions. You should also consider the limitations along with the benefits of ROI. It will help you make better decisions moving forward.
As an investor, you have to focus on your investments and determine the growth of the campaigns. You have to improve your return on investment by increasing sales, improving customer experiences, etc.
So, we hope this article helped you in understanding the basics of ROI and its importance which you can apply to your business strategies.