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Return on Investment (ROI): Definition, Types, and Importance

  • Bhumika Dutta
  • Jun 17, 2022
Return on Investment (ROI): Definition, Types, and Importance title banner

Your company has an effective marketing team that implements intelligent strategies and innovative ideas to market your product. However, it is equally important for the team to understand whether these strategies are effective and whether the money spent on marketing is well spent. 

 

Evaluating the performance, impact, and profit of a marketing campaign is one of the most important components of determining whether or not your marketing efforts are helping the company improve its bottom line. The process's insights can drive future, data-driven strategies for smarter decision-making.

 

Return on Investment (ROI) is one such concept that can help. In this article, we will learn about the definition of ROI, how to calculate it, and the various types of ROI.


 

What is ROI?

 

Return on investment (ROI) is a performance indicator used to assess the efficiency or profitability of an investment or compare the efficiency of many different investments. ROI aims to directly evaluate the amount of return on a given investment, compared to the investment’s cost.

 

By measuring return on marketing investment, firms may quantify the degree to which marketing initiatives either holistically, or on a campaign basis, contribute to revenue development.


 

How to calculate a company’s marketing ROI?

 

We understand the concept of Return on Investment, but we are yet to know how to calculate the ROI of any company.

 

In simpler terms, it can be calculated using this formula:

 

ROI = (Return - Investment) / Investment

 

This may be effective when the company is new and has not yet invested in various marketing areas. However, for businesses, it is frequently too simple, since it is difficult to understand what qualifies as an investment and what does not. For example, if a business has a marketing staff, it must decide whether or not the salary of the marketing employees is deemed an investment.

 

In that case, the marketers use this formula:

 

ROI = (Number of leads x Lead to customer rate x Average sale price) – Cost for marketing] / Cost for marketing


 

Here is the meaning of the given terms in the formula:

 

  • The number of leads: Your lead count is the number of persons that converted into a lead. These folks are already invested in your company.

 

  • Lead to customer rate: This is the number of persons that converted from a lead to a customer. So, if 50 of your leads (out of 100 total leads) become customers, your lead to customer rate is 50%, or 0.5.

 

  • Average selling price: The average price of your goods is your average sale price. You may adjust for selling prices and discounts by calculating the average.

 

  • Marketing cost: Your marketing cost is the overall amount you spend on your marketing campaign. This figure comprises ad expenditure, software, and compensation for employees working on your marketing campaign.

 

Let's look at an example to better understand the concept.

 

So, let's say a company has a 4% organic sales growth rate and runs a INR 10,000 campaign for a month. That month's sales increase was INR 15,000. According to historical monthly averages, 4 percent (INR 600) of that is organic. The formula is as follows:

 

(15,000 - 600 - 10,000) / 10,000 = 44%

 

Taking out organic growth in this example only reduced the number from 50% to 44%, which is still excellent by any standard. In practice, however, most campaigns yield much lower returns, so excluding organic growth can make a significant difference. Companies with negative sales growth, on the other hand, must view the slowing of the trend as a success.

 

For example, if sales dropped INR 1,000 per month on average over the previous 12-month period and a INR 500 marketing campaign results in a sales drop of only INR 200 that month, your calculation revolves around the INR 800 (1,000 - 200) you avoided losing despite the established trend. So, despite the drop in sales, your campaign has an ROI of 60% ((800 - 500) / 500) – a fantastic return in the first month of a campaign that allows you to defend sales before growing them.

 

It is not easy to say what a good ROI is, for any company. Your business's ROI will determine how excellent it is. It is determined by elements such as your company's overhead expenses, profits, and industry. An ROI of 3:1 may not be ideal for certain sectors, but it is outstanding for others.


 

Tools for the calculation of marketing ROI:

 

The following are some useful tools for calculating marketing ROI:

 

  • Google Analytics/Ads: 

 

Marketers that want to track the performance of their organic traffic and online marketing must use Google Analytics and Ads. You may assess the performance of your efforts and make necessary modifications to increase profitability by obtaining and analyzing data about your digital audience.


 

  • CRM software:

 

CRM software, such as HubSpot and Salesforce, assists organizations in maintaining good customer relationships by simplifying interactions and collecting crucial customer data. The data acquired via your preferred platform may assist you in determining which marketing and sales methods are most effective for your company.


 

  • Call monitoring software:

 

Call monitoring software employs online and offline campaign tracking to assist you to figure out which campaigns are resulting in phone calls and conversions, so you can adjust your approach appropriately.



 

Some common mistakes made during the calculation of ROI:

 

Return on investment (ROI) may be used for any sort of investment. The only difference in investments to consider is how expenses and earnings are calculated. Two instances of how return on investment might be overestimated are given below.

 

  • Stocks: When calculating the return on investment, investors sometimes overlook transaction fees and dividend disbursements. Transaction fees are an expense to your investment, while dividend distributions are a profit. To calculate a correct return, the investor must consider both the transaction cost and the dividend gain. The ROI would be misrepresented if this was not done.

 

  • Real estate: When calculating the return on investment of real estate, investors often overlook rental revenue, taxes, insurance, and maintenance. Rental revenue is a profit on your investment, while taxes, insurance, and maintenance are expenses.

 

Instead of dividing the final investment value by the starting cost, it's crucial to account for all expenses and returns throughout the investment's lifetime.


 

What are the types of marketing ROI?

 

There are three sorts of money you may earn on your investments when it comes to ROI. The following are some of them:

 

  • Interest: Interest is one method to earn money from your assets. Savings accounts and bonds are two types of assets that offer interest to your business.

 

  • Capital gains: If you sell an investment for more than you bought it, your firm will make a profit.

 

  • Dividends: Finally, you could be paid in dividends. In this example, you'd get a portion of a company's profits regularly.


 

What are the challenges of marketing ROI?

 

The equations required to calculate marketing ROI may seem straightforward at first, but they may soon become complicated and layered. Take into account the following:

 

  1. Marketing Metrics are Far Too Simple:

 

There are several things to consider when determining genuine marketing ROI. The most important thing for marketers to measure against is a clear and consistent sales baseline. External elements that influence campaign performance, such as weather, seasonal patterns, events, and so on, should be included in ROI calculations.

 

  1. Marketers are mostly concerned with short-term results:

 

To measure the effectiveness of their efforts, many marketers concentrate on particular, immediate data. We look at click-through rates, impressions, social shares, and other metrics much too frequently. Long-term objectives like brand recognition, customer connections, and customer retention, on the other hand, might take months or years before marketers see the full benefit. With this in mind, it's critical to match success measures to a campaign's overall purpose and timeframe.

 

  1. The Omnichannel Marketing Environment:

 

Today's Omnichannel marketing campaigns span several touch points across online and physical platforms, rather than being confined to a single channel. Only providing marketers with pieces of the total marketing effect jigsaw by focusing marketing ROI evaluations on individual channels. Unified marketing metrics that can align different data into integrated, granular insights are now required for proper marketing ROI evaluation.

 

  1. Several Touch Points Prior to Purchase:

 

A customer must go through 6-10 touch points on average before making a purchasing decision. Marketers must understand the effect of online and offline touchpoints throughout the marketing mix in order to accurately assess marketing ROI at the granular level. When calculating marketing returns, the link between these touchpoints in the sales funnel must also be taken into consideration.

 

  1. Attribution Models That Aren't Up to Date:

 

Using outmoded attribution models to quantify and attribute the effect of touchpoints and channels may lead to misattribution, which can distort ROI calculations. Aggregate metrics, such as media mix models, will not deliver the detailed information that marketers want. Granular metrics, such as multi-touch attribution models, on the other hand, will not reveal the influence of offline channels and external variables on marketing ROI.


 

Return on Influence (ROI 2.0)

 

Till now, we have discussed return on Investment. But there is another side of the coin: ROI 2.0 (Return on Influence). Many firms have started spending more time and money on persons or groups that can represent their brand and add credibility and value to them.

 

While your return on investment is quite matter-of-fact and quantifiable, this is not necessarily the case with return on influence. This is defined by the social media interaction aspects that have a substantial influence in terms of company exposure and a knock-on effect in producing leads, sales, and awareness. The return on influence, although it may not be able to be publicly assessed in cash - has a direct impact on the total campaign.

 

  • Know what your measures imply and what they don't signify.

 

There is no sophisticated calculation that can assist you to produce the optimal measure for gauging your degree of impact. Each company has its own set of requirements and a distinct emphasis.

 

Is having a large number of individuals linked to your profiles vital to you? The size of your audience will be something you'll want to keep track of and monitor. Are you trying to persuade your audience to actively connect with your content? Then you'll want to keep track of things like likes, comments, responses, and shares. Would you want to utilize social media links as calls to action to encourage people to visit your website? Then you need to keep track of how much traffic each site is bringing in.


 

  • Tell your whole tale and use real-time data

 

Being able to share your brand's narrative in real-time while gauging and measuring engagement is one of the highest returns on investment in the influence category. A well-executed public relations strategy may benefit from social media marketing as a complement and extension. That is, you may completely express your brand's narrative without being constrained by deadlines, time, content lengths, and other factors. You can make real-time comments on anything going on in the world that your brand may be associated with.

 

This demonstrates that you are accessible, aware of current events, and trustworthy. To whom do individuals conduct business? Those in whom they have faith.


 

  • It establishes you as an authority figure.

 

Your internet presence is extended via your social media networks. Consider it an enhanced version of your website or an online storefront. You're not simply making claims here; you're proving your company. You may create and distribute content that will help you connect with your target audience. Demonstrate how your product/service/business helps them address an issue.

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