How to calculate ROI? The short answer is: subtract the cost of an investment from its profit, divide the number obtained by the cost of the investment and multiply the result by 100. This will give you a percentage value, known as the rate of return on investment .
However, just knowing the ROI formula wo n’t help you make better data-driven business decisions. It is necessary to understand what the analyzed parameters are and where your company is located in relation to the market average.
In this article, you will find out what ROI is and how it is calculated , as well as the meanings of a high ROI and a low ROI. We’ll also give you practical advice to improve your performance and get the most out of your investments.
Shall we start?
What is ROI?
ROI is an acronym in English that stands for return on investment. In Spanish, we translate the term as return on investment . It is a performance metric that is used to evaluate how beneficial an investment was in relation to its cost.
In other words, learning how to calculate ROI allows you to evaluate the effectiveness of an investment and, therefore, compare which strategies are best suited to achieve a specific goal.
To give you an idea, the average ROI of the tobacco industry is 800%, while the ROI of wholesalers reaches 20%, according to a recent study .
That is, when we talk about marketing KPIs, we must take into account the products and services that are being sold, including the specific costs of operating in that sector. After all, the regulations and taxes will be different in each case and in each country.
Would you like to understand marketing concepts, such as return on investment, in depth? We recommend you read: What is ROI?
What is the ROI metric for?
Before learning how to calculate ROI, we must understand what the specific applications of this metric are. Take a look at the top three uses!
1. It serves to evaluate the gains and losses
First of all, ROI is a metric created to measure profits and losses in relation to an investment. That is, how beneficial or detrimental is the path we choose to follow in terms of profitability. In that sense, we can find out if we are making more money than we initially invested or not .
2. Serves to guide strategic decisions
Imagine that a company wants to increase its conversion rates, that is, transform potential customers into paying customers. Is it more worth investing in social media, email marketing or landing pages? Learning how to calculate ROI allows you to make this comparison objectively, revealing which investment opportunities are preferable at the time.
3. It serves to make smarter investments
Are you thinking of adopting new tools, expanding the team or creating a new department in your company? Calculating ROI can also help you make these important business decisions.
By monitoring your salespeople’s closing rate, for example, you can find out how much money each one brings to the business. Based on this information, you can assess whether the cost of keeping that employee on the team is offsetting the financial performance they bring to the organization.
As you can see, the ROI formula is suitable for any type of investment , including those that we sometimes do not see as such.
How to calculate ROI?
The great time has come to learn how to calculate the ROI of your company. Here’s the ROI formula to get you started:
ROI = (Return obtained – investment) ÷ investment x 100
The result of this account will be a percentage . Very simple, right? It takes less than a minute to do it. Let’s look at an example to clarify each step of the ROI calculation.
Example of how to get ROI
Imagine that a marketing manager has a limited budget and wants to find out which digital channel is the most efficient for converting leads. Decide to invest $ 100 in social media and $ 100 in email marketing. He managed to generate $ 500 in purchases via social networks and $ 900 through email.
Let’s do the math!
- ROI for social media: (500-100) ÷ 100 x 100 = 400%
- ROI for email marketing: (900-100) ÷ 100 x 100 = 800%
By applying the ROI formula, we obtained a return of 400% for social networks and 800% for email marketing. This means that, in this example, email is twice as profitable for the business as social media.
In other words, the email is making twice as much money for the same initial investment amount.
In a simplified analogy, it is as if you have a limited amount of money and you want to buy chocolate. In a market, you can buy two bars; in another, you manage to buy four. Do you see how easy it is to evaluate the best option based on this calculation?
What does positive investment rate of return mean?
Did you calculate your ROI and get a positive result ? This means that you made more money than you spent, which probably made your investment worthwhile.
However, this isolated result is not enough to inform you if you are doing well in the market. To do this, it is necessary to know the average return on investment rate of your sector and compare the result obtained.
For example, if the average ROI for your industry is 10% and you have reached 30%, it means that you are better than most of the companies in the market. On the other hand, if you got 5%, you may need to make changes to stay competitive.
Do you want to learn to stand out from the crowd and win more clients? We recommend you read: 5 forces that affect the competitive advantage of a company .
What does negative rate of return on investment mean?
If you calculated your ROI and got a negative result , this means that you are losing money. We explain: what this figure reveals is that your expenses were higher than the profit obtained with the investment analyzed.
There are some hypotheses for this result, but it is important to highlight one of them: perhaps you did not have enough data to make an informed decision, considering all the risks at stake.
This often happens when a company’s systems are not integrated and the available data cannot be translated into useful insights. In fact, this is a problem for 66% of organizations .
It is as if several people live in the same house, but want to use different keys for the front door. It is simply not a working strategy.
But do not worry. Here are some practical tips to improve this marketing KPI.
How to improve the ROI of your company? 8 practical tips
Now that you know how to calculate ROI and perhaps you already have your result at hand, we offer you 8 practical tips to improve your performance and get the most out of your investments.
1. Train your teams
According to an article in the Huffington Post newspaper , investing in employee training can increase company revenues by 24%.
By empowering professionals to perform their duties, the waste of essential job resources, such as time and money, is reduced.
In addition, you make employees feel important to the company and they become more proactive in returning this investment through good results at work.
2. Simplify checkout
According to Zendesk’s 2021 Trends Report , 65% of customers want to buy from companies that facilitate online transactions and allow them to be fast .
You can meet this expectation by optimizing your sales pages for different devices, such as cell phones, laptops, and tablets. This will ensure that everything goes smoothly, regardless of the platform used to search for a product or complete a purchase.
Another tip is to include buttons and calls to action that encourage the desired behavior. For example, downloading content or completing a form.
3. Improve customer service
The same Trend Report revealed that 75% of customers are willing to spend more on companies that offer them a good customer experience . In other words, the quality of the service can boost your rate of return on investment.
When a consumer feels their needs are being met, they tend to reward the brand with repeat purchases. In addition to generating more financial return, this behavior also suggests the level of satisfaction with products and services.
Do you want to know how happy your customers are? Take a satisfaction survey today and answer this question!
4. Be omnichannel
According to a study by Think With Google , omnichannel strategies can generate 80% more visits to online stores . If you learned how to calculate ROI in this article, you know that this means 8 times more opportunities for profit.
It is a strategy that creates a unified experience through different channels, fostering collaboration between teams and reducing friction for customers. Take a look at this explanatory video!
5. Automate repetitive tasks
A recent study found that marketing automations can boost team productivity by 20%. Rather than freeing teams from repetitive tasks, the data suggests that this can lead to higher revenue, faster lead conversions, and a shorter business sales cycle .
6. Adopt CRM software
According to a study by Nucleus Research , companies that adopt customer relationship management software can make their ROI 8 times greater than the amount invested initially.
By having access to analytics tools, social collaboration, and other functionalities, friction is reduced and business opportunities are created.
The support team, for example, can easily identify a customer interested in making a new purchase and refer the contact to the sales team. This integration increases the conversion possibilities at all points of contact.