What is the rate of return on investment (ROI)? How is it calculated?

the rate of return on investment ? how is it calculated: Rate of return on investment is a measure to measure the success rate of marketing and advertising campaigns and a key performance indicator (KPI) in marketing.

Rate of return on investment is a measure to measure the success rate of marketing and advertising campaigns and akey performance indicator(KPI) in marketing.

Rate of return on investment inmarketingmeans how much of the capital you spent on advertising will return to you. Of course, this rate is also used in the stock market and other investment activities, which we have nothing to do with in this article.

If you want to make clear and correct decisions from now on, read this article. In the following, we will examine the details of ROI, how to calculate it with an example, its importance and benefits.

What is ROI?

Rate of return on investmentor Return on Investment abbreviated asROIis the ratio of profit from advertising to the total cost spent on it. This index is expressed as a percentage (%) to make it easier to understand."

Also, a positive ROI means that the campaign is profitable and a negative one means that it is unprofitable.

Calculating the rate of return on investment for alladvertising methodsis not an easy task; Because in these methods, there is no accurate data for calculation. For example, you don't know how many sales the investments made in content marketing have led to and how much it has affected the increase of your brand's audience!

On the other hand, when you are dealing withdigital advertisingsuch asclick advertising, it is easier to get ROI. For example, inGoogle ads, influencer ads andbanner ads, using tools like UTM, Google TagManager (GTM) and Google Analytics (GA4), you can easily get the number of sales through advertising.

As a result, according to the cost, you can calculate the ROI.

It should also be considered that the profit from advertising and other marketing activities such as content marketing may include non-financial benefits such asbranding; But what is taken into account in calculating the rate of return on investment is only its financial and profitability aspect.

How to calculate the return on investment rate

Forcalculation of investment return rate, we subtract the amount of initial investment from the final value of investment and in other words we get the net return. Then we divide this amount by the initial investment cost and finally multiply by 100.

in this way:

This is the simplest formula for calculating the rate of return on investment. In another way, you can get the return on investment rate according to the following information:

• Number of leads:How many ad visitors converted intomarketing leads?
• Lead conversion rate:What proportion of leads have been converted into customers?
• Price of the shopping cart:What is the average price of each product shopping cart or receiving services according to the discounts?
• Costs:How much has been spent on advertising, infrastructure, human resources, media buying and content production?

The more complicated formula for calculating the conversion rate according to the above information is as follows:

Some examples of calculating the rate of return on investment

Suppose an airline company has started an Eid marketing campaign to attract more customers. The cost of this campaign was 300 million Tomans and through its implementation, 600 million Tomans of income was obtained.

According to this information, the return on investment rate of this company's campaign is obtained according to the following calculations:

According to this calculation, the rate of return on investment of this campaign is equal to 100% and it is in a profitable state.

In another example, we want to examine a losing campaign.

Suppose an educational institution has launched a new campaign to sell an artificial intelligence course. In this campaign, 270 million Tomans have been spent and 140 leads have been attracted. These leads have been converted into customers at a rate of 2%.

The company's profit from the sale of each course is about 9 million Tomans after deducting its production cost. According to this information, the investment return rate is calculated as follows:

%100 = 100 × (300000000 ÷ (300000000 – 600000000)) = rate of return on investment

The investment return rate of this campaign is negative 6.6% and it was a total loss. This information helps the owners of this business to make better decisions for the next campaigns and to spend their budget in the right place and professionally.

rate of return on investmentHow to predict campaigns?

You can predict the ROI of your new campaigns based on previous performance. For this, you must have the desired traffic of the campaign,conversion rateof previous campaigns and the cost required to attract that traffic.

Target Traffic × Conversion Rate × Average Profit Margin = Predicted Profit

After calculating the expected profit, you can also predict the return on investment rate and monitor it during the campaign.

To better understand this topic, you can pay attention to the following example:

A pharmaceutical company that has succeeded in producing a new product to treat hair loss, in its previous advertising campaign was able to sell its products with a conversion rate of 5%.

In this new campaign, he plans to get 5000 clicks and according to his previous experience, he should spend about 100 thousand Tomans for each click. On the other hand, the profit margin of this company's product is 500 thousand tomans. According to this information, the return on investment rate of this campaign is calculated as follows:

1250000000 = 5000 × 0.5 × 50000 = projected profit

%150 = 100 × (500000000 ÷ (500000000 – 1250000000)) = predicted profit

As a result, the ROI of this campaign is expected to be 150%.

What is the purpose of ROI calculation?

What is our main goal of investing? The easiest answer to this question is to earn more profit!

We prefer to get the most return on our investment and that's why it's important to know what we got for what we paid.

For investors, a realistic view of the effectiveness of advertising or the production of new products is particularly important. In the following, we will examine some reasons for calculating the rate of return or ROI.

1. Determining success or failure

There are various criteria to check whether an advertising campaign is successful or not, but the return on investment rate is one of the main criteria.

This index can be a basic criterion to see if you have reached the desired goal or not! Even in awareness raising campaigns, ROI can be one of the side factors for performance analysis.

2. Obtaining decision tools

Ad campaigns provide us with useful information for conducting future campaigns more than their effect on current sales. According to a factor like ROI, you can see which part of your activities had a positive effect and which part had a negative effect.

You can also analyze the impact of changes to make better decisions in the future. In fact, the ROI of previous campaigns is the best tool for determining the price of clicks in Google click campaigns.

3. Saving campaign budget

research and review,strategy designDigital marketing, ideation, content production and its publication are only part of the processes of successful implementation of a digital advertising campaign; Another part of the job is to evaluate the campaign during its implementation!

For this purpose, you should evaluate different advertising channels with different indicators, including ROI, to make sure that the budget is spent in the right place. By doing this, you can save the advertising budget by eliminating the losers and improving the performance.

Advantages and disadvantages of return on investment (ROI)

Calculating the rate of return on investment can have various advantages and disadvantages. First, we will review its advantages and then we will examine its disadvantages:

Advantages of ROI calculation

• The biggest advantage of ROI is that it is a relatively simple measure that is intuitively easy to understand.
• The rate of return on investment is considered a standard and global measure for calculating profitability.
• It is possible to check the cost savings and the performance of the marketing team by calculating the rate of return on investment.
• using ROI, new campaigns can be implemented according to income and profitability.
• By calculating the rate of return on investment, you can check different marketing plans before starting advertising and spending money and choose the most optimal method.

disadvantages of ROI calculation

• One of the disadvantages of ROI is that its financial calculations are complicated, and as a result, the probability of error in its calculation increases. Therefore, it is better to carry out this process by people who are experts in this field so that all aspects are considered and the calculations are closer to reality.
• The effectiveness of some marketing methods cannot be measured with this method.
• The profit calculated in this method is close to reality, but it is not accurate.
• This method does not take into account the return of the investment holding period.

What should be the rate of return on investment?

If you have been with us until now, you might ask yourself this question, what should be the rate of return on investment to be considered suitable and acceptable?

The reality is that the ideal rate of return on investment depends on various parameters such as the type of industry, marketing methods, market competition, advertising channel,digital marketing strategyand many others.

However, 200% ROI is considered poor, 500% ideal and 1000% exceptional.

How to increase the rate of investment return

Now that you know what the ROI is, its importance and how it can be increased, it's time to get acquainted with the methods of increasing it. In the following, we will introduce 3ways to increase the rate of investment return.

Of course, pay attention to the fact that increasing the rate of return on investment and planning to achieve this goal, untilIt depends a lot on your business's past marketing and advertising experiences.

Start-up businesses are forced to start with a percentage of trial and error in order to obtain the required information; In marketing science, collecting this information is more important than sales.

1. Aiming and maintaining focus

Before starting the advertising campaign, set achievable, long-term and relevant goals (Smart Goals). These goals can be selected based on ROI or other performance indicators and can be consistent with budget constraints.

During the campaign as well, these goals should be analyzed continuously to make sure it is on track. If you are far from the goals of the campaign, in this situation you can stop the loss and correct your campaign.

As a result, the investment return rate also increases.

2. Choosing profitable marketing channels

various advertising and marketing channels such assite SEO,Instagram marketing, email marketing,banner ads, Google AdWords, etc., for different businesses, functions They are different.

According to previous performances and recorded results, it is better to allocate a bigger part of your budget to these channels to increase ROI.

3. Testing and optimization

The only way to know if something works is to test it!

After testing, it is time to analyze and review. Any advertisement and method that does not have a good ROI should be modified and removed if necessary. This will help you run more effective ads, increase your ROI, and make more profit.

Rate of return on investment shows you how much you are on the right track

final words; Calculation of return on investment rate at a glance

Rate of return on investment (ROI) is a simple measure to calculate the profitability of an investment. This criterion also has limitations, but nevertheless, it is still a key indicator that business analysts use to evaluate and rank investment options and advertising and marketing activities.

If you need advertising and marketing to increase sales and earn more money, you can entrust the work to a reputableInternet advertising agencyto run a successful campaign for you according to the existing subtleties.

During the implementation of this campaign, it is necessary to pay attention to various factors to achieve success; What our colleagues in the Digital Marketing UnitAdvertising CenterIran Navin do forbig brands of the country.

If you also want to start this cooperation by receiving the necessary advice, contact our marketing experts⟧455⟧.