The acronym ROI comes from the English return on investment, which means return on investment. Through this indicator you will have a perspective of how much your business earned or lost by making a certain investment.
We created this article to tell you what return on investment is, how to calculate it and what its formula is. In addition, we are going to share with you the advantages of tracking this metric and how to interpret it. 📈
What is ROI?
The acronym ROI comes from the English return on investment. Its translation in Spanish is return on investment.
In a nutshell, we can say that ROI is going to give you a perspective of how much your business gained or lost after making a specific investment. It is a metric that you can calculate for various actions that you carry out in your business.
For example, if you have an online women’s clothing store and you launch a campaign to promote the t-shirts of the new collection, by calculating the ROI you will be able to verify if this action is bringing the desired results.
How to calculate ROI?
Calculating the ROI is relatively simple: from the profit obtained, you have to subtract the money invested and divide it again by the money you invested.
See the ROI formula below:
ROI = (Profit – Investment) / Investment
Let’s see how to apply this calculation with an example:
An online video game store advertised on and spent $2,000 in one week. As a result of the campaign, the store sold 20 sets at a price of $600 each. Let’s put those values ​​into the formula:
Profit: $12,000
Investment: $2000
ROI = Profit ($12,000) – Investment ($2,000) / Investment ($2,000)
ROI = $5
This means that for every peso invested in this campaign, the business got 5 back.
It should be noted that in this example, we simulated the ROI calculation for a specific offer. In other cases, you will also be able to include fixed or variable costs in the investment section, such as the amount you invest in the company, for example.
How to interpret the ROI?
As we mentioned before, the ROI indicates what the return of a certain action is for each peso invested. In this sense, this metric can help you conclude which campaigns are worth continuing to invest in and which ones are not.
Let’s go back to the example of the store that sells video games, where the Facebook Ads campaign had an ROI of 5. Now, let’s imagine that one was also included in the marketing plan.
For this Google Ads campaign, let’s say the spend was also $2,000, but 10 sets were sold for $600 each. In this case, the ROI would be:
ROI = ($6,000 – $2,000) / $2,000 = $2
If we compare the two campaigns, it is clear that Facebook Ads brought a much higher return than Google Ads. In a situation where the entrepreneur needs to cut costs, for example, ROI helps make this decision.
Advantages of measuring ROI
Now that you know how to calculate and interpret ROI, let’s analyze the importance of this indicator for your business:
1. Identify the biggest sources of income for your company
Through the calculation of the return on investment, you will be able to observe in which areas and through which actions the greatest amount of profit enters your business.
In this way, you will accurately identify the performance of an advertising campaign, of SEO actions (optimization for search engines, with the aim of achieving a better service) or of a special training in which your customers participated. collaborators.
In the example we saw earlier, we compared a Facebook Ads campaign with a Google Ads campaign. While you probably already have prior knowledge about your marketing habits, calculating ROI will allow you to validate that information.
2. Recognize the most effective communication channels
Just as you can compare the ROI of the different sectors of your company, it is also possible to identify which ones bring the greatest return.
Here you can compare the performance of the chat of your online store with the attention by WhatsApp or direct messages through social networks.
As they are ideal channels to make sales —in addition to answering queries from potential customers— you can measure ROI and determine which communication channels are worth investing more resources in.
3. Optimize strategies
By identifying which are the actions with the highest return, you will be able to adjust and optimize your different actions, customer service, marketing, etc.
Continuing with the example of the virtual video game store, let’s imagine that a period of 6 months is defined to keep the Facebook Ads and Google Ads campaigns active. If after the first month Facebook is seen to have a better ROI, then it is possible to redirect more budget to that channel and reduce the Google Ads investment.
3 cautions to keep in mind about ROI
Despite all the advantages of calculating ROI, we advise you to keep the following in mind:
1. The ROI calculation does not take into account the variable of time
This means that you run the risk of comparing, for example, the return on investment of a Youtube campaign that was carried out for a week with a campaign that lasted a whole month on Facebook.
For this reason, you have to avoid falling into the trap of comparing unequal investments that lead you to hasty and erroneous conclusions. Always look at equal time periods for a fair comparison.
2. ROI does not take into account external factors
In addition to the time variable, another problem with the ROI formula is that it is not complemented with other types of information such as the seasonality of products or inflation.
For this reason, an online store selling leggings and bikinis, for example, should have two different ROIs at two different times of the year: one for the spring-summer period and the other for autumn-winter.
3. It can be misleading not to use indicators other than ROI
As a conclusion of the two previous points, we can affirm that the return on investment does not provide complete information in some situations.
For this reason, it is convenient to observe other indicators such as the average ticket, and the acquisition cost and value of each client.
💡 If you want to know what each of these indicators consists of, access this article on the .
Everything ready to calculate the ROI of your business?
Calculating ROI can add a lot of value to your e-commerce. It will allow you to make decisions based on data and evaluate all the actions of your strategy, with the aim of optimizing them.
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