ROI: what is return on investment and why is this metric so important
With so many customer acquisition and retention tactics, figuring out what’s best for your particular business can seem pretty daunting.
Fortunately, there is ROI, one of the decisive metrics within digital marketing.
Follow the text below to understand what ROI is, its importance, how it can be applied and what its benefits are.
What is ROI?
ROI is an abbreviation for return on investment. As the name implies, ROI tells you how much money your business is losing or gaining by investing in different channels and strategies.
This is an indicator that informs the exact result of each action or company campaign , in addition to measuring the cost of new tools and training in your area.
That way, you can see which investments are worthwhile and how to optimize those that are already up and running.
This metric is important because it allows you to assess how a given initiative contributes to your company’s performance.
Based on the ROI, you can plan concrete goals and results and understand whether it is worth investing in a certain channel.
To calculate it, just do the following operation: ROI = revenue – costs / costs.
Income is considered the total financial value received as a result of the evaluated investment.
For example, in a marketing campaign, revenue consists of the specific profits that are generated from the budget allocated to the strategy.
The cost includes everything the office invests to earn revenue in return. This is where technology, professionals and financial aspects come into play.
break even
Break even (or a company’s breakeven point) is an indicator used to measure the line between profit and loss of a company in a given period of time.
The break-even point is the exact point at which a company’s total revenues and expenses are equal for a given calculation period.
If the break-even point indicates a financial loss, it means that the organization’s profit in that period was lower than expected (and vice versa). This data is important for calculating the ROI of strategies and other areas of activity.
Discover the benefits of ROI
Now that you have a clear definition of what Return on Investment is, let’s dig deeper into the benefits of using it on a day-to-day basis.
Possibility of measuring financial results
When calculating ROI, professionals have the opportunity to measure their bottom line.
That is, you can more clearly assess the cost of a certain investment and check whether the return is adequate.
Support in decision making
Another advantage of using ROI is to use information as a tool for making strategic decisions.
By measuring the rate of return on investment, you can more reliably determine the feasibility of a new project or whether it is better to wait a while before making a decision.
Measuring the effectiveness of the organization
ROI is a strategic management tool. In other words, you need to use it frequently to keep the company effective, for example.
Suppose this venture is continually investing in a particular service or strategy.
To know if the action is effective, in this specific case, the ideal is to continue using the metric to see the impacts brought.
So, if you find that your returns are low, you can define measures to make this investment more efficient.
Increases team motivation
Working with metrics today is one of the best ways to motivate your team, regardless of the industry, as it makes it easier to understand what needs to be improved and how.
In this scenario, considering the construction scenario, ROI is a great way to motivate prestressed slab sales and marketing teams when you are sure that results are being delivered.
Easy to understand and disseminate
Organizational culture is often a major obstacle to the development of some businesses.
The introduction of new management systems, other tools or policies that are significantly different from normal practice may face some resistance at the time of implementation.
However, due to the ease of calculation, the ROI can facilitate the adoption of new practices.
Transparency
Identifying projects, products, services and other factors is much easier because it is not too difficult to understand and has the flexibility to apply to any type of investment.
The details of each investment are clarified and management can process everything directly with actual results provided.
How to apply ROI?
ROI first emerged as a financial market indicator designed to determine a company’s return on investment.
However, it is extremely flexible and can be used in virtually any area, making it well known in other niches such as project management, marketing and production.
It’s essentially useful for assessing whether a given investment is worth it – which is why it’s so important for e-commerce. How about knowing some of the uses of ROI calculation?
Definition of objectives
Opening a stainless steel handrail shop for stairs, for example, involves making sales forecasts. Total sales must be sufficient to pay all maintenance costs and still generate a profit.
One of the best ways to make this estimate is based on ROI. This is because ROI represents the ratio of a company’s total sales to its total costs.
Let’s say you’re at your break-even point today. If you add costs and revenues, the result will be zero.
Therefore, your store is not generating profit, but knowing what ROI you want, it is possible to determine objectives for this and improve the campaigns and actions taken.
Viability
The implementation of the new CRM is a project often developed in e-commerce. After all, you need to know your customers and get in touch with them. But doubts always arise.
Is it the right time to invest? What will happen to the ROI of this new tool?
Knowing the cost of implementing CRM and the benefits that CRM can bring to your business such as better lead management, better communication and customer-based segmentation will help you predict sales growth.
You can use this forecast to calculate the cost of the new CRM implementation, or any other proposed solutions, so you can see the return on that investment.
If it’s worth it, you need to proceed with the project. If the change doesn’t increase sales effectively, you can leave that investment for another time.
Efficiency
Another reason you need to learn how to calculate ROI is to understand how marketing strategies can help you generate revenue.
Imagine investing in multiple channels such as:
- Content marketing;
- Sponsored links;
- Social media;
- E-mail marketing;
- Direct mail.
It is necessary to identify which of these strategies will bring the most benefits to long-term maintenance – as well as which will be the least advantageous.
The ROI calculation provides an accurate picture of each strategy’s contribution to acquiring and promoting e-commerce traffic.
This allows you to define more realistic goals for each of the channels involved and also optimize your marketing investment to achieve the maximum economic benefits for the company.
Acquisition
Companies that are somehow connected to technology and the Internet are constantly evolving.
In reality, there are new solutions every day, so it’s imperative to consider whether the investments are worth it.
Today, ROIs have emerged as one of managers’ greatest allies, providing mathematical answers to their questions.
For example, suppose you are investing in a new payment system for your online store.
With the variety of options offered, this system will allow more people to buy from you and streamline the management of your e-commerce.
This means that your team’s income will increase by 20% and your work will decrease by 10%. But is the investment really worth it? ROI can tell you that!
Decision-making
Finally, ROI greatly assists in making strategic decisions. Especially if you face multiple growth opportunities and don’t know which one to bet on.
In terms of immediate marketing and sales results, as well as the ability to maintain market relevance, ROI has a profound impact.
So, use this information as a starting point to make the right decisions and start making more money from your business.
The applications and advantages highlighted here are the guides you will ever need.
