You have seen this acronym used many times, but let’s make sure you know what it means and how to calculate it.
What is ROI?
ROI means Return (what you have received) On your Investment (the amount you have spent to generate your return).
On the surface, this is a simple concept and can be calculated very easily. Let’s look at a couple of examples to reinforce this idea:
Someone invests $1,000 in the stock market and at the end of one year this investment is worth $1,225. The return (what we received) is $225 and the investment (what was spent to generate the return) was $1,000. Therefore the R.O.I. on this investment was 22.5% ($225/$1,000).
How to Calculate ROI
Now let’s take this concept and use it in calculating the R.O.I. of ABC Company’s marketing investment in customer acquisition.
In 2018, ABC Company invested $36,000 ($3,000 a month with a digital marketing company to manage its paid advertising campaign. This $36,000 included money spent on Ad Words with various platforms, Google, Facebook and LinkedIn).
Let’s look at the return this investment yielded.
The marketing campaign generated a total of 220 leads during 2018 from which ABC Company was able to turn 11 of those leads into paying customers. Here is where the analysis can get more complicated. More data is needed in order to calculate the ROI ABC Company generated in 2018.
We know the investment was $36,000. The 11 new customers spent $33,335 with the Company during 2018 (ABC sells annual subscriptions billed monthly). The return on this investment in 2018 was negative ($33,335 of revenue generated on $36,000 of investment resulting in a negative return of $2,665 or -7.4%).
On the surface, one might look at this as a bad investment. However, we need to dive deeper and understand the lifetime value of these customers.
We know our total investment is $36,000 and taking it a step further we uncover that our average customer stays active for 26 months and bills at an average of $461.81 per month. Our marketing efforts in 2018 generated lifetime revenue of $132,078 for these 11 customers (11 x $461.81 per month average x 26 months as a customer). Now we have the data we need to understand the real R.O.I. generated from our 2018 marketing activities.
The actual R.O.I. generated was 267% ($132,078 of revenue created on $36,000 of marketing spend generated a return of $96,077 or 267%).
Not a bad return! For every dollar invested in this marketing campaign, we received $2.67 of revenue.
This was a simple example and didn’t take into consideration the cost of any ABC Company staff working on the campaign or any sales related costs (if any) of obtaining these new customers. There are many factors that go into calculating ROI This calculation can be overwhelming for some.
In order to know how your investments are performing, start tracking your financial data. Tracking the data is the first step. Once you have several months of data you can start to analyze it and evaluate the success of your efforts or better put, know the Return on Your Investment!
If you need help, reach out to ChoiceFinance and schedule a meeting to review your information.