How to Calculate ROI: An Easy-To-Follow Guide
| 3 min read
Marketing is an ever-evolving and ever-growing field that requires constant innovation, strategizing, planning, and investment. As a business owner, you have to invest in marketing, but how do you know which marketing efforts are bringing in how much returns? After all, it is important to utilize your capital in marketing strategies that will be profitable for your venture. One of the ways to ensure that the marketing investments you make are profitable is by calculating your return on investment, or simply, ROI.
ROI aids you in predicting the profit or loss that you may experience when you invest in a particular marketing method. While the calculations may not be accurate, an approximate value will let you compare the different marketing efforts you have undertaken. This will allow you to put your money in profitable investments instead of making losses on bad ones that don’t bring in any returns or very little returns.
What is a good ROI?
With so many marketing strategies buzzing around, from social media, pay-per-click, and email, to billboards, trade shows, and cold calls, it can be quite overwhelming for entrepreneurs to choose the options that most fit their businesses.
And, how do you know how much ROI is good to understand which marketing efforts are working best? The answer is by setting a standard ROI. When your ROI is equal to or more than this standard, you will know that the marketing effort is working and is profitable enough for your business.
While you can set your own standard ROI for each marketing campaign, you invest in. Regardless of the standard you set for yourself, do note that it will be a ‘standard’ rate, meaning the value might fluctuate, but it should be more or less close to the standard value you have set to make the marketing strategy a profitable one.
Another point to note is that different businesses are bound to have different outputs to similar marketing efforts. The range of risks associated with one business to generate, say, a 10% ROI for the same marketing strategy may be different for another business. Thus, it is important to figure out whether the deal is worth investing in, if
- You will be able to handle the losses in case of any,
- And, whether the risks you take outweigh the profits
How do you calculate the ROI?
It is always advisable to calculate the ROI for every marketing effort you choose to pour your money into because the profit you gain from each is different. The amount of money invested is different for every plan. Thus, it is important to put the calculations in a formula that will inform you about the profitability of each.
The simplest formula to find out the ROI of a marketing plan is to subtract the marketing investment made from the profit made from the investment and divide it by the marketing investment made. Since the ROI is always expressed as a rate to help compare, the initial result is multiplied by 100 for the final result.
The formula can be mathematically expressed as,
What is an ROI formula in Excel?
There are numerous formulae to follow when you are calculating your marketing efforts’ ROI on Excel. You can consider the net income, capital gain, total return, or annualized return.
In the case of the net income, the formula reads as,
ROI= Net income/Cost of investment
It is very simple because all you have to do is replace the formula with the values, and you will get the result.
The formula becomes slightly different in the case of capital gain,
ROI= Capital gain/Cost of investment
Since it is based on the capital that you gain at the end of an investment period or cycle, the terms in the formula have been slightly changed to incorporate the same, but the function remains the same.
For total return, the mathematical formula can be expressed as,
ROI= (Ending value – Beginning value) /Cost of investment
In this formula, the difference in the cost and the profit are considered while calculating the ROI to get a better insight into the total returns made on a marketing effort.
In the case of an annualized return, the calculation is maintained by considering a yearly time period,
ROI= [(Ending value/Beginning value) ^ (1/number of years)] -1
What is ROI in simple terms?
In simple terms, ROI is a method of calculating how much profit you have gained from an investment or the extent of losses suffered from the investment. If the resultant value is positive, then it implies that your gain has proven to be more than the costs, and a negative value signifies losses made.
Instead of providing a whole number, ROI presents you with a rate that helps you in comparing the different marketing investment plans and choosing the one that is best for your business’ profit, progress, and growth.
Any kind of investing involves a lot of risks, especially when you are on a tight budget. Hence, it becomes exceedingly easier if you have a statistical idea about where you should put your money for maximum returns.
What is a good ROI for marketing?
A marketing campaign is carried out in order to boost sales and generate more revenue. Hence, whether a particular campaign is effective can only be found out by the extent of revenue it brings in. Hence calculation of the ROI for all your marketing efforts makes all the difference by giving you an approximate idea of the profit gained and the revenue generated due to the implementation of each campaign.
The standard value for marketing ROI is expressed in the form of a ratio. A ratio of 5:1 for marketing ROI is considered good enough, whereas a ratio of 10:1 is considered an outstanding profit, while a ratio of 2:1 is considered not much profitable. That being said, it is important to find out which campaign works the best for your business because individual requirements are important and unique.
What Is Roi In Business?
Investing in schemes without any legitimate profit is futile because you will soon end up exhausting all your capital and gain nothing. Instead, a business that relies on ROI to crack every deal makes it big in the market by their clever strategies of investing in the ones that are rated better than the rest. It also aids you in formulating a financial plan for your business so that you can draw up strategies within a budget and expect the best possible outcome from them.
Moreover, every project that your company undertakes by making an investment becomes easier to handle when you are well aware of what to expect. Again, there is no specific rate of ROI that is deemed best for your business. For example, the ROI for a business specializing in manufacturing will be different from a company that deals in software.
How To Calculate Day Based Revenue Based Roi
If you specialize in doing business on a daily basis, then knowing the day-based revenue-based ROI is necessary to invest in smarter schemes and make the best profit out of them. The mathematical formula simply requires you to subtract the opening balance from the closing one and then divide the resultant by the initial balance. Finally, the result can be expressed as a percentage by multiplying it by 100.
How To Calculate Monthly Revenue Based ROI
Even if the net profit may be the same for an investment, the cost and time period also play a huge role in determining the ROI for that investment. Also, sometimes seasons and other external stimuli impact marketing efforts, which is necessary to note in order to maximize your profits. Thus, it is important to find out how your monthly investments have influenced your overall revenue and profit. You can simply calculate your monthly revenue-based ROI by dividing the monthly profit by the monthly cost of the investment and multiplying the result by 100.
How To Calculate Quarter Based Revenue Based ROI
For calculating the quarterly ROI of your marketing strategies, you need to just add all the monthly ROIs you have calculated for the quarter you wish to get the ROI for. Or you can also use the formula of subtracting the quarterly investment from the quarterly profits made, dividing it by the quarterly investments, and multiplying the result by 100.
How To Calculate Year Based Revenue Based Roi
The mathematical formula for calculating the revenue-based ROI on a yearly basis is as follows,
Annual ROI= (1+ROI)^(1/n)
The formula for deriving the ROI has already been provided in the beginning, but the time period was not mentioned. But it is an essential factor to consider while calculating the return on investment, which is why n stands for the number of years an investment takes to mature.
By calculating and using ROI for each of your marketing campaigns as a guide for your investments, you can ensure better profitability and growth for your company. This article provides a simplified explanation of marketing ROI. But there is more to calculating the ROI than meets the eye. If you are still unsure, you can always opt for authentic online marketing ROI calculators.