If you’re anything like me, you’re freaking out because I used the word “math”. When a guy like me says it’s simple, believe me, it really is. Despite the fact that it’s simple, I think it’s the single most important formula you will ever use in your life time.
It is also quite famous. Guys like Warren Buffett, Bill Gates, George Soros et al have used it and pretty sure your coffee shop guy has also used it.
All it does is show you how much you’re profiting from your investment.
You may have heard of it, it’s called RoI aka. Return on Investment.
Used Quite Frequently And Casually
Many people use it only for a handful of things but fail to understand that it can be applied to almost anything, like marketing.
College guys use it and say, “one night at a bar can get me 3-5 phone numbers of women. But one day at the library can get me 6-8 phone numbers of women. The RoI at the library is insane!”
Or, parents spending money on the education and good upbringing of their children. The children go on to become super smart guys like Elon Musk. One may say the RoI with Elon was through the roof for his parents.
You get it now, right?
But RoI is super powerful when applied in your business.
Sure, But How Does It Help My Business?
Now let’s see how it can help you grow your business.
Here’s how simple it is:
You start by identifying your marketing expenses.
You find your profits from the sale of your products/services and link them to these individual marketing expenses.
Let me explain what I mean with an example:
Say you have an in-house marketer whose salary is $5,000 per month. Or maybe you’re paying a marketing agency.
He runs all your digital marketing, especially your Google Adwords campaigns with a monthly budget of $10,000.
You can thereby conclude that your online marketing expenses are $15,000 per month (salary of marketer + marketing budget of Google Adwords) which is your “investment”. We call it an investment because it has the potential to double your money and gives it back to you. It’s not a cost.
Now, say your revenue for the month was $150,000.
What you have to do is identify the part of revenue that came in due to digital marketing. Use all your CRM, lead tracking data if you have to. But this part should be easy because Digital Marketing is all about attribution.
For the sake of the example, let’s assume out of the $150,000… $100,000 came in as a result of digital marketing.
Good. Now, run that number through this super simple RoI formula:
Earnings – Investment / Investment = ROI
The first part of the formula is simply finding your net profit by the way.
From our example, the formula would be:
$100,000 – $15,000 / $15,000 = 5.66
Now, you can interpret this 5.66 in the most simple way as “for every dollar you invested, you got back $5.66”
If you ever heard someone say “omg, the RoI on that is 566%” – they mean what I said above. And all they did is tweak the formula to:
$100,000 – $15,000 / $15,000 = 5.66 x 100 = 566.67%
Now that the most important formula is out of the way, let’s see how it helps grow your business. Excited??
Application Of The Formula To Your Business
Remember how you made $150,000 and you identified $100,000 as the result of digital marketing? You noticed how there’s an extra $50,000 in the revenue pool that is NOT due to digital marketing? That $50,000 or the extra amount is usually the result of your other marketing drives, like flyers, radio, TV, etc.
Or who knows where it came from.
Could be anything, really.
But you see, if you were able to calculate the RoI the way you just calculated for Digital Marketing, then you can do the same for those other marketing drives too.
If Digital Marketing is giving you $5.66 for every dollar, and if Radio is giving you $2 for every dollar, and TV is a measly $0.59 for every dollar (red flag loss btw). Then you have a clear winner – Digital Marketing. Right?
Now all you have to do to make your business grow in a predictable fashion is increase spending in digital marketing, and lower it in the other areas. If you look back 6 months, say, and you see that on average every month you were earning $5-$7 back – you now have a pattern! Congratulations!
A pattern that shows consistency.
That should be enough for you to say, “heck, let me increase that Google Adwords budget”
It’s important to know the dollar value of your returns as it helps you make smart decisions. This is why it’s also important for you to make sure all your digital marketing is measured so you have something to run against.
Here, give it a try:
Hope this has been helpful to the point where you will do the same run that Costanza just did up there… 😉