What is ROI
ROI is an abbreviation for Return Over Investment. Essentially, it’s a way to measure what kind of profit you’re yielding based on the money you’re investing in a marketing strategy.
ROI is an important metric as it can tell you if you’re spending money in the wrong areas.
Marketing strategies are capable of delivering a lot to a business. However, much of what is delivered is unrecognized.
As data pours in from a plethora of sources, it is used to demonstrate the value found within the marketing strategies — and the money that is used to keep those strategies in place.
There are a lot of metrics out there, and it can be overwhelming to pick and choose which ones you want to use.
Whatever happened to choosing a marketing strategy that works because you’re getting a lot of engagement out of it?
There’s absolutely nothing wrong with taking that approach — as long as you have the expansive budget to support it.
The reality is that not all companies work with large budgets. Additionally, even when there are large marketing budgets, there’s the decision to know how much is being spent and if the return is there.
This is why the ROI has been a mainstay within the world of metrics-driven marketing for as long as it has.
The Return Over Investment is a critical metric as it can make it easier to prove the need for employing certain marketing strategies. As marketers tout that it takes money to make money, executives want proof that it is true.
ROI has become a buzzword, and when so many companies want to look at their bottom line, the return over an investment works as an effective way to measure the success of a marketing strategy.
Over time, however, ROI calculations have gone wrong, leading many to stop embracing its importance.
Why is ROI Believed to Be Dead
If something doesn’t yield the results that you want, you stop using it. This is what happened with ROI.
Surveys have shown that thousands of marketers around the globe have stopped using ROI as a metric because they feel that it is no longer accurate when measuring the effectiveness of a marketing strategy.
Did ROI suddenly fail? Is it no longer relevant? No. Marketers have killed it off, yet it needs to be resurrected.
Too many marketers stopped understanding how ROI was calculated. They were using the wrong numbers, so the metric didn’t make any sense.
Rather than backtrack to figure out where they went wrong, they declared that ROI was dead. After all, why focus on something that is clearly not helping you?
Before you can understand why ROI was declared dead, you have to understand why the metric was devised in the first place.
The Return Over Investment metric is helpful when assessing capital projects. The investment is made once, making it easy to see what the immediate return is.
Advertising is an investment — and therefore, it would make sense that the ROI would fit in well.
The problem is that most people spend money on advertising each and every month. It is often a short-term expense with a short-term return.
For those who want to look at the long-term, it’s hard to make sense as to how ROI plays into the strategy.
After all, if you spend money on SEO strategies, it could take months to truly see how it works. Brand marketing can take even longer because it can manage customers at all stages of the sales funnel.
In order to calculate ROI, you look at the net profit return divided by the advertising investment. If you don’t see that net profit return, though, marketers argue that ROI is a useless metric.
So, since most people didn’t believe it could be worked, they ditched it. They felt that the ROI was a false metric, so they went and buried it as deep as they could.
Many, even after being told that they can still use ROI, refuse to use it. Their argument is that advertising expenditures are continuous.
They believe that it should be placed into the profit and loss account. They believe that it delivers a false picture of what’s going on.
Further, they believe that ROI, when there is a high ratio calculated, proves that more money should be spent.
Marketers who refuse to understand ROI choose to ignore it. They believe that it can be manipulated, and they don’t want to depend on a metric that can be so easily manipulated when it comes to proving the overall worth of a particular marketing strategy.
Why ROI is Actually Alive and Well
ROI is a buzzword that most people understand. It’s also an easy number to calculate — if you’re using the correct numbers.
To understand why the metric is so important, it’s first important to understand where the most common mistakes are made during its calculations:
- ROI is measured too quickly within the sales cycle
- KPIs are being mistaken for the actual ROI
- Pressure causes marketers to prove performance faster
The reality is that the Return Over Investment is based on when the return is achieved, and that can only be obtained once a customer has managed all the way through the sales funnel.
If a measurement is pushed before the sales cycle has been completed, the ROI isn’t actually being measured.
It’s important to understand the true length of your sales cycle. This can vary from months to years depending on various factors (B2B vs B2C, cost of product, industry, etc.).
If you don’t allow the sales cycle to run its length, you’re dealing with incorrect data.
KPIs, otherwise known as key performance indicators, are being used as an ROI instead of what they are: an indicator to help with optimization.
Many digital marketers will measure the ROI within the first month, even though they know that their sales cycle is six months.
Their metric is shared as the ROI, the final number, as opposed to identifying that it is a KPI.
Depending on all that is going on and what tools you have in place to drive people through the sales funnel, a lot may happen in month two or three of the sales cycle.
As such, the ROI is being shared as being considerably lower than what it really is. This can lead to lower marketer confidence because they don’t want to share their metrics.
Marketers work hard to establish strategies and launch campaigns that will result in a strong ROI.
The problem is that many of them jump the gun to report because of internal pressures and tight budget allocations.
They calculate too fast and are forced to change their route because the return isn’t as strong as it should be.
When the ROI doesn’t back what the marketers know in their hearts to be true, that a campaign is working, they ditch the ROI metric altogether.
Instead, they choose insufficient metrics to prove that a campaign is working, such as higher website traffic or more revenue.
ROI is alive and well, but it has to be used correctly for it to prove the true return on marketing investment. Knowing when you’ll see the return after making the investment is critical.
How to Calculate ROI
If you’re going to use ROI as the effective metric that it is, there is a right way to calculate it.
Otherwise, you’re either not calculating ROI or you’re getting a false number that may end up dictating whether you continue to move forward with a particular marketing strategy.
One of the main reasons to even calculate such a metric is to ensure that you’re getting the value.
Failure to calculate too soon can mean that you’re ending a strategy that is actually really good for your company.
Are you calculating ROI?
As many have declared ROI to be dead, it has also led many to claim they’re calculating the return over investment only to not be calculating that at all.
If you are assessing the financial return on your investment, then it is the ROI.
If you’re trying to assess something else, you have to find a different acronym to use to describe your metric tool.
Calculate the ROI
You want to divide incremental profits by the investment to calculate your ROI. This is where things can get tricky.
First, you never want to use total profits. The reason is that it jades your metric.
Instead, you have to subtract the profits that would have taken place even if you didn’t make the investment.
The easiest way to understand this is to look at proving the ROI of investing in a website. If you only had in-person sales prior to the website launch, then you can’t count those in-person sales.
You would only count the online sales as these are the sales directly impacted by the launch of your website.
Second, you have to wait until the end of the sales cycle. If you’re monitoring the sales that came from a particular channel, wait until the end of your typical sales cycle — whether it’s one month, six months, or even a year.
Only then can you know if you have residual marketing efforts in play.
Pay Attention to the Numbers
When marketers were surveyed to find out about measuring ROI, it was clear that many weren’t paying attention to the details.
For example:
- You cannot poll consumers to get your ROI as they don’t hold that data
- You cannot calculate using managerial judgment as it cannot be subjective
- You must have both an investment and a return to calculate ROI
If you’re not done investing or you’re not done obtaining the return, you can only establish a KPI that will lead to the ROI.
Don’t be one of the marketers that try to make a case about ROI being true or false without having all of the facts.
Once you change your approach to the way in which you calculate ROI, you will learn not only how to use it but what other metrics are just as important.
How To Use ROI Properly
Marketing metrics allow you to prove that you’re on the right path. As you implement new marketing strategies, you have to be sure that you’re spending money where it matters the most.
Understanding the Return Over Investment allows you to figure out whether you’re using marketing dollars correctly.
If you’re a marketer, you need this metric to prove value and worth. If you’re an executive, you need this metric to continue spending money.
Explore ROI with Other Metrics
ROI isn’t the only number you should be using, either. A long time ago, marketers decided that they were going to live and die by ROI. It is one of several metrics that you should embrace.
After all, you can’t oversimplify the reality: Marketing isn’t just about profit. It’s also about sentiment and behavior. By using more of your metrics, you can be sure to get the whole picture.
The CAC (Customer Acquisition Cost) is an important metric, and it goes hand in hand with your ROI.
Essentially, it is the cost for you to acquire customers. It looks at the total cost of marketing expenses over the span of time and the number of customers you acquired during that time.
This allows you to actively work to spend less money to acquire your customers, and that can work hand in hand with ROI.
The average order value, too, is important. This is one of the easiest metrics to calculate, and it can show you how to focus your marketing strategies to increase the order value.
Then, as you master the CAC to a lower value and boost your average order value, it will help your ROI as well.
By using all of these numbers, it’s easier to hold off on delivering the ROI too soon. Provide the other numbers. Then, let your marketing strategy sit long enough to have an impact on consumer behavior. Only then can you be sure that the metrics are providing you with the whole picture.
Help Where You Need It
Use all the metrics that you can get your hands on. This way, when you are forced to calculate ROI too early, you can present it as a KPI.
Then, you can use other metrics to prove that you’re on the right path until you can present the ROI when it really and truly is the accurate number.
There’s no reason why you have to be overwhelmed by ROI. Marketing can and should be easy so that you can start to work more productively.
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