Understanding ROI

ROI (return on investment) is the ratio of your net profit to your costs. When it comes to marketing, it’s typically the most important measurement for an advertiser for understanding RoI (these days, however, they use a much more specific term Return on Advertising Spend or RoAS). Because it’s based on your specific advertising goals and shows the real effect your advertising efforts have on your business.

For simplicity, our RoI post will assume I is investment used for marketing. Because hey, we’re a digital marketing agency in Toronto after all. 😉

The exact method you use to calculate ROI depends upon the goals of your campaign. But again, we’re keeping it simple where you can answer, if I put in $x into this marketing campaign, how many $y did I receive back?

Gary said “Hey, that’s amazing because I put in $1 and got back $4” – this is a typical phrase people use to describe RoI and sometimes, they even so far as to saying “That’s the kind of ATM I like!

Moving on.

How to Calculate Return on Investment

Here’s the dirt simple formula: (Revenue – Cost of goods sold) / Cost of goods sold

Let’s say you have a product that costs $100 to produce, and sells for $200. You sell 6 of these products as a result of advertising them on Facebook.

At this point, it cost you 6 X $100 = $600 to produce those products. And you made 6 X $200 = $1200 in sales.

But now we gotta add the marketing cost into the formula as well because hey, cost of production is one thing, but then there’s also cost of marketing. Let’s say your Facebook Ads (marketing) costs are $200, your goes up to $800 ($600 is the cost of producing the 6 pieces of product + $200 for Facebook Advertising).

Your ROI is:

($1200 – $800) / $800
= $400 / $800
= 50%

In this example, you’re earning a 50% return on investment. For every $1 you spend, you get $1.50 back. Don’t make the mistake of thinking that’s any good though.

For physical products, usually, the cost of goods sold is equal to the manufacturing cost of all the items you sold plus your advertising costs, and your revenue is how much you made from selling those products. Again, that’s simplifying it. If you want to take in all costs, think of warehousing, shipping, packaging, etc and that’s the best way to calculate RoI really.

The amount you have spent or costs you have incurred before making the next sale becomes your Cost per Acquisition. or CPA.

If your business generates leads, the cost of goods sold is just your advertising costs, and your revenue is the amount you make on a typical lead. For example, if you typically make 1 sale for every 10 leads, and your typical sale is $20,000, then each lead generates $2,000 in revenue on average. Again, the amount it costs you to get a lead is known as cost per acquisition.

On this post, you’ll find more details and even an RoI calculator.

understanding roi
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