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How To Measure ROI And Why To Do It

It is important for entrepreneurs to measure the effectiveness and payback of advertising campaigns. One way is to take into account ROI (return on investment). Let’s figure out how to count it – using the example of infographics.

There is a simplified formula that most companies have taken as a rule. It does not take into account financial and accounting costs (logistics costs, office supplies, salaries, etc.). Considering only the expenditure on advertising and the profits received as a result of the advertising campaign. Taking this into account, the rate of correctly called ROMI (return on marketing investment), as it reflects the return of marketing investments.

 

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We’ve seen other varieties of this formula – after all, every business changes it a little for themselves. So, only one of the options is presented below.

What do you need to calculate ROI (ROMI)?

  • Margin or mark up;
  • Spending on advertising;
  • Income from the advertising campaign.

We emphasize that the ROMI formula does not take into account all business data, therefore it contains certain errors.

 

How to calculate ROI (ROMI), if we know the margin?

 

Gross Profit = Income (according to ecommerce data) * Margin

 

Gross profit – all profit without financial and accounting costs (logistics costs, office supplies, salaries and so on). For example:

 

  • Margin: 25%.
  • Spending on advertising: $ 1851.
  • Revenue from ecommerce data: $ 9209.3.

Gross profit = $ 9209 * 0, 25 = $ 2302.2. ROI (ROMI) by gross profit = (2302.2 – 1851) / 1851 * 100% = 24.3%. The advertising campaign paid off completely and brought 24% of the profits from spending.

 

How to calculate ROI (ROMI), if we know the mark-up?

Gross profit = Revenue (according to ecommerce) – Cost

 

In this case, we consider gross profit through cost, since we do not know the margin. To calculate the cost, use the following formula:
Cost = Income / Markup

If the mark-up is 33%, then in the formula we consider this as 1.33. We explain: the income is 133% with an extra charge (cost price 100% + margin 33% = 133%), so we got the number 1.33. Example:

 

  • Mark-up according to client’s data: 33%.
  • Spending on advertising: $ 1851.
  • Revenue from ecommerce data: $ 9209.3.
  • The cost price = $ 9209.3 / 1.33 = $ 6924.2.

 

Gross profit = $ 9209.3 – $ 6924.2 = $ 2285.1. ROI (ROMI) by gross profit = (2285.1 – 1851) / 1851 * 100% = 23%. You can pay attention to the difference in the calculation of ROI (ROMI) through markup and margin. This is due to inaccurate percent. A margin of 33% is not translated exactly into a 25% margin. All expenses for advertising should be considered with taking into account agency commission.

 

ROI-calculation

 

The problem with counting orders by phone

 

If phone calls are tracked, you need to add to the income from ecommerce data the percentage of revenue from calls, and in the expense column, take into account the costs of telephone calls. If phone calls are not tracked and we do not know how many orders were accurately and how much was made over the phone, then when calculating the ROI, it’s better to indicate that the calculation takes place without taking into account phone calls. Many argue about the correctness of the formula, but it is often impossible to find out all the data from the client.

 

ROI-Example-800x450

 

Conclusions

 

General view of the formula: ROI = (Profit – Spending on promotion) / Spending on promotion * 100%. But it’s worth remembering the errors, because the formula does not take into account all the expenses of the business during the campaign. However, the dynamics of changes are an objective indicator. For example, 20% profit growth is a good indicator, and 1000% profit is an exceptional success. Once again we recall that it is more correct to call this indicator than ROI, but ROMI, but confusions are enough even without it.



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