Mastering ROI: How to Calculate ROI for Marketing, Operations, and Customer Engagement
You invest in social media campaigns, promote your company through a series of meticulously crafted e-mails, perhaps you even try cooperating with influencers, and then… Yeah, what happens next? How can you know if the measures taken bring the expected results? The answer is – by calculating ROI. Find out how to master the ROI formula and see your marketing activities pay off.
What Is ROI?
Return on Investment (ROI) is a financial metric used to evaluate the efficiency or profitability of an investment.
It’s calculated by taking into account the net profits generated by the investment and the initial cost of that investment (more on how to calculate ROI later). A high ROI indicates that the investment gains compare favorably to its cost. The metric is versatile and applicable in various contexts – from stock investments to marketing activities.
Why calculate ROI?
For one, it’s one of the most palpable metrics that can indicate if whatever you’re doing with your business is actually working and what makes cash flows. ROI helps investors determine whether the actions they’re taking bring profits or are more on the side of a sunk cost. It’s also a good guidepost on where to allocate future resources.
Especially that ROI can help you with those, too. As it turns out, companies that calculate ROI are 1.6 times more likely to receive higher budgets.
How to Calculate ROI
Return on Investment (ROI) measures the profitability of an initial investment, indicating how much net profit is made relative to the investment cost.
To calculate ROI, you need to deduct the initial cost of investment from the gain of investment and then divide the results by the initial cost of investment. To express it in percentage, you have to multiply the score by 100. That way, you’ll know how cost-effective your investment was and whether it actually pays off in the long run.
EXAMPLE: If you invest $1,000 in a business and later sell your stake for $1,200, your profit is $200. Dividing the $200 profit by the $1,000 initial investment gives an ROI of 0.2, or 20%. This means you earned a 20% return on your investment.
Where Can ROI Be Applied?
ROI calculation is always a good idea, but it’s especially effective when applied to specific business areas. That way, you get a better view of which activities work best and which need improvement in greater detail. Below, we’re listing fields that many will find the most important in tracking ROI.
Marketing ROI
1. PPC advertising ROI
PPC (Pay-Per-Click) advertising ROI measures the return generated from paid search campaigns. On average, the ROI for PPC marketing is as high as 200%. How does your business compare? You can calculate its PPC-driven net income by comparing the revenue from clicks to the advertising costs.
2. Email marketing ROI
E-mail marketing remains one of the most significant streams of revenue your company can invest in. It’s estimated that for every 1$ spent on e-mail campaigns, marketers make over 40$ in return. That equals an ROI of over 4000%! How is it calculated? Email marketing ROI assesses the revenue generated against the costs of creating and distributing emails. High ROI in email marketing indicates effective targeting, content, and call-to-actions that convert recipients into customers.
3. Social media marketing ROI
From video content to the impact of chatbots and AI, the power of social media marketing is bigger than ever. To measure its ROI, you need to track metrics such as engagement, website traffic, lead generation, and conversions directly linked to social media activities. Calculate the ROI by comparing the revenue generated from these activities to the costs of social media campaigns, including ad spend, content creation, and management.
4. SEO ROI
SEO (Search Engine Optimization) ROI measures the return on investment from organic search traffic improvements. It is determined by comparing the revenue generated from increased search visibility and rankings to the costs of SEO efforts, indicating the value of search engine optimization. SEO generates positive ROI in many ways, including by expanding your reach, boosting brand perception, or lowering customer acquisition costs.
5. Influencer marketing ROI
Is influencer marketing still profitable? According to 86% of marketers, it remains a very important way of raising your brand awareness among audiences. To find out whether influencer marketing works for you, start by comparing the revenue generated from influencer-driven campaigns with how much these partnerships cost you. Not every cooperation will be beneficial, but if done right, the ROI of influencer marketing can be over 500%.
6. Content marketing ROI
Content is an essential part of any marketing campaign. To calculate its ROI, track key performance indicators such as website traffic, lead generation, and conversions attributable to content efforts. Compare the revenue generated from these activities to the total costs involved in content creation, distribution, and promotion.
Customer engagement and retention
1. Loyalty program ROI
Loyalty programs are often perceived as a cost-center – but are they really? A study by Comarch says that loyalty programs reduce customer attrition by around 7%, which can increase profits by as much as 95%. To find out if your loyalty efforts are more of a cost or a profit center, you can calculate the ROI of your loyalty program, taking into account key metrics such as program setup costs, the number of members, repeat purchase rates, average order value, and customer retention rates.
2. Customer service ROI
Another customer-related area where ROI can be applied is customer service. To calculate it, track metrics such as customer retention rates, increased sales due to enhanced customer satisfaction, and reductions in service costs or churn rates. Calculate the ROI by subtracting the customer service costs from the financial gains (e.g., increased revenue or cost savings) and then dividing by the customer service costs, such as staff or maintaining support channels like call centers and e-mail support.
3. CRM implementation ROI
Customer Relationship Management systems are software platforms designed to manage a company's interactions with current and potential customers. They streamline processes by organizing customer data, tracking communication, and automating workflows. They often have a very positive ROI – 800% on average. To calculate it, compare the revenue gains from better customer relationship management to the implementation and maintenance costs.
Technology and operations
1. Technology investments ROI
Though calculating the ROI for technology investments may be less common than for marketing, it’s still a good idea to assess whether the tech we use is actually all that beneficial. Every company wants to keep up with the latest tech, but new doesn’t always mean better, and there are some circumstances where spending money on the most cutting-edge equipment doesn’t make that much sense. That’s where technology investment ROI can help.
2. Supply chain optimization ROI
From inventory management to demand forecasting, modern companies put a lot of effort into optimizing their supply chain. To find out whether these measures are profitable, it’s best to compare the cost savings and additional revenue generated from the optimization efforts to the total costs incurred in implementing these changes. This involves tracking metrics such as reduced operational costs, improved efficiency, and increased sales, as well as optimization costs. That’s how you’ll make out your supply chain optimization ROI.
Human resources and training
1. Training and Development ROI
ROI can also be an effective tool in human resources. When applied to staff training and development, it’ll help you assess the return from employee training programs by comparing the productivity gains and improved performance to the costs of these initiatives. High ROI indicates that training enhances employee skills, leading to better job performance and organizational success.
Summary
Mastering ROI across various domains can empower your business to make better, knowledge-driven decisions and, of course, yield profitable results. Whether it's through enhancing marketing strategies, optimizing operations, or improving customer engagement, calculating ROI provides a clear view of what works and what doesn't, which is the first step toward making a positive change.