The world of PPC is filled with enough acronyms to turn anyone’s head. And it’s our job as your digital marketing agency to not only know what these mean, but also translate them into words our clients can actually understand when it comes to their business.
Today I’m breaking down one of the most commonly thrown around terms in paid media: ROI.
So first things first, what is it?
ROI is the acronym for Return on Investment, generally calculated as:
(Return – Spend) ÷ Spend = ROI
So, for example if your spent £500 marketing something and that generated a return of £1,500, your calculation would be:
(£1,500 – £500) ÷ £500 = 2
(often represented as 200%)
So – in this example – you’d have generated a return of 2x your initial investment.
But what does it actually mean?
Well, ROI can actually mean many things depending on your industry etc:
Example 1
You could use it based on your margins to control and measure your cost efficiency.
So, I know that I only make a 33% margin, so my ROI needs to be 0.66 to break even.
i.e. If everything you spent to generate the sale was 66% of the product value and you have a 33% margin, then you’ve broken even.
Example 2
You could use it based on your desired return to control your advertising costs.
So, I know that I need to make a +200% return on my advertising costs to appease the board.
i.e. if everything you spend on advertising is 33% of your return, you’ll generate an ROI of 2.0.
Ultimately ROI is a measure of return that can be adjusted to match the context in which you want it to.
In my 20 years in Digital Marketing, I’ve heard people refer to it in several different ways and generally they were all adamant that theirs was the correct way.
But, ultimately whether it’s product-specific, advertising-specific or even manufacturing-specific, all are perfectly acceptable variations, along with many more.
What can affect my ROI?
Depending on the model you’re using, many base metrics can impact your overall ROI.
If we take the advertising model ROI as an example: (Revenue – Advertising Costs) ÷ Advertising Cost = ROI
Within advertising cost are several base metrics including but not limited to:
- Cost Per Click
- Budget
- Conversion Rate
- Average Order Value
- Etc…
Any increase or decrease in these figures will ultimately have an impact on your overall ROI.
For example, if your cost per click increases by +20% week-on-week and all other metrics stay the same, then you’re going to pay +20% more for the same traffic and ultimately revenue, meaning your ROI will be -20% than the previous week.
How can I increase my ROI?
There are several ways to improve your ROI, such as:
- Testing: Be willing to test the components of your base metrics. For example, if your conversion rate is a little low, try optimising the search terms you’re appearing for to increase the quality of your traffic OR perhaps try improving your landing page by adding more calls to actions and having a key call to action above the fold.
- Pricing: One of the key base metrics in your ROI is your average order value. So, by ensuring your pricing is not too low and potentially increasing your pricing (keeping in mind the elasticity of demand) you can keep the same base costs etc, but increase your average order value and therefore your ROI.
- Upselling / Cross-selling: Often businesses get too bogged down with the ROI of an individual product as opposed to the lifetime value of a customer. Instead, try looking at how you might increase a customer’s value at the checkout with a companion item or perhaps with a follow-up email and a discount code for their next purchase etc.
What else could I use?
If ROI is perhaps a little complicated due to shifting manufacturing costs or varying margins etc, why not try using one of the below metrics instead?
ROAS: Return On Ad Spend is the direct comparison of sales generated to costs.
Revenue ÷ Ad Costs = ROAS
ROE: Return On Equity is the measure of how effectively a company generates shareholder profits.
Net Income ÷ Shareholder’s Equity = ROE
ROA: Return on Assets is the measure of how well a company generates profits from its total assets.
Net Income ÷ ((Beginning Total Assets + Ending Total Assets) ÷2) = ROA
CLTV: Customer Lifetime Value is the total profit expected from a customer over their connection with a business.
Average Order Value × (All purchases ÷ All customers)
The above metrics have many alternatives and variations, but in my experience, I’ve found these 5 (including ROI) to be the most common, simplistic and effective to understand and communicate to the wider business.
We’d love to chat
The best ideas start with a good old conversation. Let’s have a chat about how we can help you.
Complete the form and one of the directors will be in touch.
Or just pick up the phone and call us, we’re on 03334049888.
Awards & Accreditations
