What is ROI and how to calculate it in your SME?
Knowing ROI is especially important when it comes to measuring the profitability of our marketing actions and making strategic decisions in the future. In this post we tell you everything you need to know about this metric and why it is essential for your SME.
What cannot be measured, cannot be improved. You may have heard this premise and, basically, what is meant by it is that it is essential to know the results of any action or strategy in order to know what to improve and what not to improve. In other words, we need to know the profitability of the actions taken to determine whether they have been worthwhile or whether it is necessary to change strategy. But how is this done?
The answer lies in one of the most important metrics to measure, which is ROI or Return on Investment. And if you don't know what it is or why it is so important, we invite you to continue reading this post.
What is ROI?
ROI means return on investment and we could define it as an indicator that measures the yield or profitability of an investment. In other words, it is the profit or loss obtained for each euro invested in a specific action.
A high ROI rate indicates that an investment generates favorable profits compared to the investment cost.
It should be noted that ROI is not only a metric in marketing, although it is certainly indispensable in digital marketing strategies. In general terms, ROI serves to evaluate the efficiency of an investment, as it allows us to determine what are the gains related to the amount of money invested in any process of a business.
In this sense, ROI is most useful for identifying the gains and financial return on an investment when the business objectives are concrete and measurable. Analysing investments in terms of monetary cost is the most popular method because it is the easiest to quantify, although it is also possible to calculate ROI using time as an investment.
Why is ROI important?
As we mentioned above, knowing the return on investment in any action you take in your company is very useful to know whether or not that investment is worthwhile. In addition, calculating ROI can bring you the following advantages:
- It helps you understand how an investment influences your business, whether it is negative or positive.
- It allows you to evaluate your past business decisions and improve future ones.
- Based on the information obtained from ROI calculations, you can compare new business opportunities and decide which to choose.
- It allows you to identify which investment yields the highest returns in order to devote more effort and optimize resources.
- It helps you understand which strategies you should change or in which areas you should invest more.
Now that you know the importance of ROI, let's see how to calculate it.
How to calculate ROI?
The most common formula for calculating ROI is as follows:
ROI = [(Net Profit - Investment) / Investment] x 100.
To understand it better, we will it explain it with an example. Let's assume that we have launched an ad campaign on social networks to attract buyers to our website with an investment of 300 €. Once the campaign is finished, we calculate its net profit and discover that we have obtained €900 in sales coming from it.
We would then calculate the return on investment as follows:
ROI= [900 – 300) / 300] x 100
This would mean that we would have made a 200% investment in the social media campaign. In other words, for every euro invested, we would have a profit of €2.
Having understood the process of how to calculate ROI, let's see how we can optimise it.
Tips for optimising ROI in a digital marketing strategy
Before starting with this point, we must clarify that there are many ways to increase ROI. However, there are some basic strategies you can try.
- Define the objectives
It is essential, before carrying out any action or strategy, that we have clear what our objectives are to know what elements we need to calculate the ROI and on which ones we need to focus efforts.
- Know your market
Focusing your actions on the right people will improve your metrics, and as a consequence, so will your ROI.
- Measure and analyse
Keeping track of metrics and KPIs is essential to measure the success of an investment. Surely there are a wide variety of improvements you can make between what you have invested and your profits that you can only know if you perform an analysis of the metrics.
In conclusion, ROI is a performance metric, but it is a very valuable tool if you are looking to get the most out of your investments. Now that you have all this information, are you ready to take your SME to another level?