ROI formula: how to calculate and use in marketing

ROI (Return on Investment) is a profitability ratio that helps calculate the return on investment in a project. It allows you to determine the efficiency of the money spent.

ROI Formula: (Project Income — Project Costs) ÷ Project Costs × 100%

By using this formula, you can assess how effectively your investments are being utilized.

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Example of Calculating ROI

An online store selling decorative cosmetics launched contextual advertising on Yandex.Direct, Google Ads, and targeted advertising on Facebook*. They spent $2,800 on Yandex.Direct, $3,100 on Google Ads, and $3,000 on Facebook* ads.

After two weeks, they calculated the revenue. Yandex.Direct brought in customers who spent a total of $9,600. Customers from Google Ads bought products worth $8,700. Facebook* generated sales worth $4,000. The ROI for these advertising channels is calculated as follows:

• Facebook*: (4 000 $— 3 000 $) ÷ 3 000 $ × 100% = 33%

What is a Good ROI?

In the example above, the revenue from each traffic channel was higher than the advertising costs. However, the ROI for Facebook* was only 33%, for Google Ads it was over 100%, and for Yandex.Direct it was over 200%. So, what is considered a good ROI for advertising?

Each business sector has its ideal Return on Investment (ROI) metric. Typically, for advertising channels, an ROI above 100% is considered good, meaning the campaign is profitable. If it’s below 100%, the campaign is not breaking even.

However, ROI is a relative metric and does not fully reflect the business situation in isolation from other indicators. For example, ROI might be high because the advertising costs were low, but the company sold only a small number of products, resulting in low overall revenue.

Consider a company with production capabilities to sell 100 units of a product per month. In one month, the company sold only 30 units. In another month, the company sold more — 100 units — but spent more on advertising.

Therefore, analyzing only the ROI is not enough. Other business metrics to track include: Customer Acquisition Cost (CAC), average order value, Lifetime Value (LTV) of a customer, revenue, expenses, and profit from advertising.

Why Calculate ROI?

• Evaluate the effectiveness of advertising expenses: Understanding how well your advertising investments are performing.
• Plan the marketing budget: Allocate funds more efficiently.
• Identify the most profitable traffic channels: Determine where it is most beneficial to sell your products and services.

Knowing ROI helps effectively adjust strategies for the overall development of the company and its products. This metric helps understand how the company should evolve to stay afloat.

Difference Between ROI, ROAS, and ROMI

All three metrics help determine if the business investments are paying off:

• ROI (Return on Investment): Takes into account all business investments.
• ROAS (Return on Ad Spend): Evaluates the effectiveness of advertising by considering only the costs and revenues from advertising.
• ROMI (Return on Marketing Investment): Assesses the effectiveness of marketing investments, considering only marketing expenses such as advertising, flyer printing, and writer fees. It does not include employee salaries or product production costs.

Often, all three metrics are referred to simply as ROI for convenience in marketing analytics.

When to Calculate ROI

ROI helps compare the profitability of different investments. It can be calculated for individual projects or to assess the overall effectiveness of the company. This metric is especially informative when there is a direct correlation between business expenses and revenues, such as:

• Direct online sales
• Loyalty programs
• Sales promotion through marketing events
• Evaluating the performance of sales managers and marketers

How to Calculate ROI

1. In Excel: Create a formula once and regularly update the data for traffic channels.

• Start by creating a column with the names of advertising channels, columns for expenses and revenues, and a separate column for ROI calculation.
• For convenience, format the expense and revenue columns as “Currency” and the ROI column as “Percentage.”

By using these steps, you can effectively monitor and analyze your ROI to make informed business decisions.

2. Using ROI Calculators: Tools like those from Unisender, Advego, and Checkroi offer easy ways to calculate ROI without needing to set up a formula. Simply input your revenue and expenses to get the ROI.

Drawback: These calculators still require manual data entry, and you will need a place to store the results, so maintaining a spreadsheet or another type of document is still necessary.

3. Through Comprehensive Analytics Services: When a company has only a few advertising campaigns, analyzing their effectiveness isn’t too difficult. However, as the number of traffic sources, keywords, and ads increases, the workload for the marketer grows significantly.

Imagine the time required to manually enter advertising expenses for 100 keywords into a spreadsheet, then gather and analyze data on leads and sales from a CRM to assess the effectiveness of each keyword.

Solution: Comprehensive analytics automates these routine processes, saving time and reducing errors.