Return on Investment (ROI) is a key metric for whether marketing is succeeding or not. In other words, it lets you know if the investment made by the company is making a profit.
What is the benefit of calculating ROI in e-commerce?
Analyze Investments
The results obtained in each marketing action must be followed. Thus, improvements could be adopted. For example, if a campaign is not performing well, you can choose to improve or delete it. By contrast, if a campaign is doing well, you may know if it is worth increasing the investment for even better results.
Cost reduction
By analyzing return on investment, costs will be reduced as you will not lose your resources on campaigns with poor results.
Priority setting
If you have multiple campaigns active, you may know from ROI analysis which ones deserve the most investment.
How to calculate ROI in e-commerce?
The calculation of ROI is simple. There are two mathematical formulas:
Formula 1: ROI = (total return – investment) / investment
Formula 2: ROI = [(total return – investment) / investment] x 100
For example:
Your online store has made an investment in a € 2000 Google Ads campaign. Through this campaign, people made purchases and company earned € 7000. Therefore:
Formula 1:
(7000 – 2000) / 2000
5000/2000
2.5
According to Formula 1, your ROI was 2.5.
Formula 2:
[(7000 – 2000) / 2000] x 100
(5000/2000) x 100
2.5×100
250%
According to Formula 2, your ROI was 250%.
The final value corresponds to the financial return obtained from the initial investment made in e-commerce. We know that in this example, the company tripled the amount invested.
This example was very simple, just to understand how to calculate. However, when implementing it, you should consider all investments that have been made in a particular action or campaign. It can be email marketing / sms marketing, social media campaigns, infoproducts (infographics, ebooks, etc). Just sum all the investments and include them in the formulas.
What if the ROI is negative?
When calculating ROI in e-commerce, you may risk the result being negative. If so, you should look for action to get around the poor result as the company is losing money.
It is advisable to stop the campaign immediately and look for the error. If you can, correct it, otherwise stop the campaign and think of another strategy.
In short, it is very important to measure the ROI in e-commerce, to know if the company is making or losing money. If you ignore this metric, you risk not meeting your marketing goals and you’ll be damaged.