ROI – what is it?

Every entrepreneur running a business (especially e-commerce) should measure whether the investments made are profitable. By monitoring the profitability of investments, it is easy to measure whether the budget allocated to advertising activities is being spent effectively.

For this, ROI is an essential indicator.

What does ROI tell you and why should it be measured?

ROI (return on investment) – return on investment. The ROI indicator tells us how much profit is generated by every penny spent. It is very often used to measure the effectiveness of performance marketing activities, i.e. performance marketing, but also SEO. In practice, different campaigns may bring different levels of return, so it is worth measuring their effects on an ongoing basis – and taking optimisation measures.

We calculate ROI:

ROI = net profit/total investment x 100

The indicator is given as a percentage.

How to interpret the value of the indicator?

A positive indicator tells us about the profitability of the investment – if the ROI comes out at 80%, it means that for every zloty spent we receive 0.80 cents of profit.

In this approach, it is extremely important to take into account all the costs actually incurred (or, more precisely, outlays, since, as we know, not every outlay is a direct cost, e.g. the purchase of a fixed asset), and not just the advertising budget. Then the indicator will show us the real profit.

Negative – if the ROI is negative, it means that our investment is not profitable.

ROI, and the level of conversions – in order to accurately measure ROI, it is also very important to measure the level of conversions from our activities, e.g. the best converting keywords, campaigns, purchases, registrations – what is most important to us from a business point of view. Tracking conversions will allow you to determine the profitability of the keyword, campaign and determine the conversion rate and cost per conversion – for this purpose you can use the free analytics tool Google Analytics.

Example:

An online shop selling pet supplies generated a net profit from sales of £10,000. On top of this, it incurred costs associated with Google Ads of PLN 3 000 and delivery costs of PLN 2 000.

ROI = 10 000 /5000 x 100

ROI = 200% – this means that for every PLN 1 000 invested, there is an additional PLN 2 000 profit.

ROI vs. ROAS – differences

Speaking of ROI, it is also worth mentioning ROAS, which tells us what the return on costs incurred for advertising is. In relation to ROI, it gives a “narrower view” because it only shows the return on costs incurred for advertising. It does not take into account the costs in the bigger picture, so ROI is more precise.

How do you calculate ROAS?

ROAS = Revenue/costs x 100.

ROI or ROAS?

It is worth measuring and monitoring both metrics. ROAS will give us control over campaign costs, while ROI will allow us to measure whether activities are profitable and whether it is worth continuing to invest in them. Continuous monitoring of both indicators will give you a broader perspective on your advertising activities.

Summary

ROI = return on advertising,

ROAS = advertising revenue.

ROI is definitely worth measuring on an ongoing basis. When we are selling on the Internet and investing in advertising activities, we will have constant supervision of campaign effectiveness, we will know how much profit our advertising activities generate – which will have a real impact on the development of our business and sales growth.