ROI: What It Is and Who Benefits from It

ROI (Return on Investment) is a tool used to evaluate the effectiveness of investments in a project or marketing campaign.

Below, we'll look at what ROI is and when it’s needed.

Example of calculating ROI

A positive ROI means the business is profitable, while a negative ROI indicates a loss.

ROI shows how much profit is generated from the money invested in a project, marketing campaign, or new equipment. The higher the ROI, the better the investment is performing — every dollar invested brings more profit. ROI calculations account for all expenses related to achieving the goal: production costs, advertising budget, employee salaries, rent, and more.

Analyzing a campaign using ROI is not just about assessing profit. It reveals strengths and weaknesses and shows which sales channels and advertising platforms provide the greatest returns. For instance, ROI can indicate whether it’s more profitable to sell directly to customers or through intermediaries, as well as suggest where it’s best to place ads — in print publications, social media, or search engine ads. Based on this data, companies optimize future budgets, shifting resources to areas that generate the most profit.

Note: A closely related but more specialized metric is ROMI (Return on Marketing Investment), which measures the effectiveness of marketing expenses. ROMI only considers the marketing budget, excluding production costs, salaries, and rent.

There’s also ROAS. For more on the difference between ROI, ROMI, and ROAS, see the article "What is the Difference Between ROI, ROMI and ROAS."

When ROI is needed and not needed

ROI is used to compare the efficiency of investments in various company projects. It applies both to individual events and the overall assessment of an organization's activities. ROI is most indicative in situations where income is directly tied to expenses.

For example:

• Online sales: comparing the effectiveness of ads, sales channels, and landing pages.

• Loyalty programs: evaluating their profitability and impact on customers.

• Sales promotions: understanding the effectiveness of marketing activities.

• Sales and marketing departments: assessing employee performance.

However, ROI is not always a useful metric. Here are cases where ROI may not be informative:

1. You have a brand-new business

In the early stages of a startup, expenses often exceed income, resulting in a negative ROI. This may not reflect the true situation, as the poor performance could be temporary due to investments in growth.

2. Your marketing model is too complex

In multichannel marketing, where it's difficult to identify which campaign directly led to a sale, ROI loses its clarity and usefulness.

3. There's a large price difference between products

If a company offers items with a wide price range, such as luxury or rare products, ROI doesn't account for the proportion each product contributes to overall revenue. This can lead to distorted assessments of effectiveness.

How to calculate ROI

ROI formula

Income in this case refers to the gross profit, which can be calculated using the formula:

Expenses are the total invested capital and other costs associated with the project.

The ROI metric shows how much profit is earned for each unit of currency invested.

ROI helps evaluate the return on investment for both the company as a whole and its individual segments. It indicates which product groups, services, or business areas generate the most profit.

For example, an online clothing store can calculate the ROI for different product categories (outerwear, footwear, accessories). The higher the ROI for a specific group, the more profitable it is.

If accurate data on the income and expenses of the project is available, you can use online calculators to calculate ROI.

What to use when calculating ROI

Let's take a closer look at which tools are convenient for calculation.

ROI calculators

There are specialized calculators for ROI calculations, such as Advego and Checkroi. You don't need to input any formulas — just enter your income and expenses, and the program will calculate everything for you.

Example of ROI calculator

However, these calculators have their downsides too. First, you'll have to enter the data manually. Second, the history of calculations usually isn't saved, meaning you'll need to create a spreadsheet or another document for storing information. For more thorough analysis and data storage, Excel is a better option.

Excel or Google Sheets

Create a table with several columns: ad channel names, expenses, revenue, and return on investment (ROI). For convenience, format the "Expenses" and "Revenue" columns as "Currency," and the "ROI" column as "Percentage."

For example, if your revenue is in cell A1, expenses in cell A2, and ROI in cell A3, use this formula: = (A1 - A2) / A2

You can also add other business metrics to the same table for a more comprehensive analysis. However, keep in mind that all data needs to be entered manually and regularly checked, which often takes a lot of time and can lead to errors.

End-to-end analytics services

For small advertising campaigns, evaluating effectiveness is a simple task. However, as traffic sources diversify and the pool of keywords expands, marketers face a flood of routine tasks.

How much time would it take for a specialist to manually process ad spend data for dozens (or even hundreds) of keywords, then gather sales information for those keywords, and finally analyze the effectiveness of each keyword?

This is where end-to-end analytics comes into play.

Altcraft Platform collects information from various sources about the customer in a single interface: demographic, behavioral, and transactional data.

What should the return on investment be

The ROI metric provides information about profitability:

• A positive ROI means the revenue exceeded the investment.

• A neutral ROI means the revenue equals the costs.

• A negative ROI means the project did not pay off.

However, it's not always clear what constitutes a "good" ROI. The context matters when evaluating investment effectiveness. ROI is influenced by:

• Industry: Some sectors traditionally have lower returns on investment. The S&P 500 (Standard & Poor's 500 Index), which tracks the performance of the 500 largest publicly traded companies in the U.S., has historically shown an average annual return of around 10%. However, this is an average figure. In some years, such as 2020, tech companies far exceeded this 10% mark, while businesses in other industries posted much lower returns, with some even experiencing losses.

• Business model: Depending on the model, companies have different target ROI benchmarks.

• Company goals: ROI varies based on the company's development stage and current objectives. For instance, launching a product requires significant investments, and the initial ROI may be low or negative. But over time, as sales increase, the ROI improves. A good ROI may take a couple of years to achieve.

To accurately assess investment effectiveness, it's important to consider not just the ROI itself, but also the surrounding context.

How to increase ROI

To boost ROI, you need to focus on two key areas:

1. Cost optimization

• Advertising campaigns: Use cross-channel analytics to identify ineffective traffic sources. Optimize targeting, ad copy, and creatives in profitable channels, and turn off unprofitable campaigns. This will reduce spending on ads that don’t generate sales.

• Other expenses: Besides advertising, analyze and optimize costs related to logistics, rent, material procurement, etc.

2. Increasing revenue

• Improving conversion: Enhance the quality of landing pages, optimize the sales funnel, and implement A/B testing to increase website conversions.

• Increasing average order value: Offer customers additional products and services, develop appealing promotions, and provide discounts for bundled purchases.

• Sales team efficiency: Ensure that your employees are offering customers additional products or services.

Remember to regularly monitor and analyze ROI. By tracking your metrics, you can adjust your strategy and make the right decisions to achieve your goals.

Common mistakes when calculating ROI

1. Incorrectly defining the attribution model

In businesses with a short sales cycle, it's simple: the user visits the website, researches the product or service, places an order, and makes a purchase. In this case, the entire "weight" of the sale is often attributed to the channel from which the person first arrived at the website and made a purchase immediately.

However, in businesses with a long sales cycle, it can get complicated. A person may visit the website multiple times from different ads before making a purchase. In such cases, the "weight" of the conversion needs to be distributed among the various channels that influenced the buyer's decision.

By defining the correct attribution model, you can understand the importance of each interaction the customer had with different traffic channels.

2. Failing to account for the average sales cycle length

In some industries, such as the restaurant business, purchase decisions are made quickly (ordering food can take as little as ten minutes). In others, like when buying a washing machine or a laptop, more time is needed for consideration and comparison.

The mistake happens when the length of the sales cycle is not factored into ROI calculations. A user might first visit the site through an ad in August but purchase an expensive product a month later. If the effectiveness of the ad is judged without considering the sales cycle, it may seem ineffective. In reality, the ad led to a sale, but with a delayed effect.

3. Ignoring additional advertising costs

These could include contractor fees, ad platform commissions, creative design costs, printing materials, and much more. As a result, the ROI report may show inflated profits, not reflecting the real situation. This gives the business a distorted view of marketing campaign effectiveness. Relying on incomplete data could lead to wrong decisions, resulting in wasted resources and missed opportunities.

4. Misallocating revenue across ad campaigns

The challenge lies in tracking which sales came from which ad.

Here’s a typical example:

A user sees an ad, likes it, clicks through to the site but doesn't find the necessary information and leaves. The next time, they type the website's name directly into the address bar and submit an order. The sales manager tries to find out which ad worked, but the buyer likely won’t remember.

Because it’s impossible to pinpoint exactly which ad led to the sale, the marketer has to guess or calculate the overall ROI for the entire traffic channel. This distorts metrics and makes it difficult to draw accurate conclusions about campaign effectiveness.

Conclusion

ROI is a metric that evaluates the return on investment. It helps businesses understand how effectively they are utilizing their marketing budgets. By calculating ROI, you can identify the strengths and weaknesses of your advertising campaigns, optimize expenses, and maximize profits.

However, it's important to be mindful of common mistakes when calculating ROI, such as incorrect attribution models, failing to account for the sales cycle length and additional costs, and inaccurately allocating revenue across campaigns.

Regularly analyzing this metric and adjusting your marketing strategy based on the results will help you achieve better outcomes from your advertising campaigns.