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How to Calculate ROI: It’s Not as Hard as You Think

How to Calculate ROI

We’ve all heard and probably used the term ROI. We know that it stands for Return on Investment. 

But what exactly is Return on Investment?

In this article, we will to look at; what ROI is, how to calculate the ROI for your business, and your marketing and provide you with a simple ROI calculator to use for your business.

So, what is ROI?

ROI is a calculation commonly used to measure the financial return you’ll receive from the money you’re investing. It’s the count or multiplier of how many dollars you get back for every dollar you put in. Essentially, you’re creating a clear snapshot to determine whether or not the investment is worthwhile.

Calculating your ROI is actually pretty simple, and as such, has made this metric a universally understood measurement of the profitability of potential investments.

ROI is different to simple profit

Profit is the financial figure you arrive at after subtracting your expenses from your income. Calculating ROI allows you to measure the effectiveness of your potential investment.

What is considered a good ROI?

What determines a good ROI depends on what your business is looking to achieve and the investments you’re considering. 

Simply put, if you calculate your ROI and it comes back as a positive figure, then it’s likely a good investment to consider. You can use this figure to compare different investments and see which is likely to deliver the better return. If your ROI calculation returns a negative result, then it appears that the investment will make a loss for your business, and you should stay away from it.

ROI does have its limits

While calculating ROI is an easy way to get a quick idea of the value of an investment, it’s not appropriate in all circumstances.

For example, suppose you perform free marketing activities that earn you income, such as through an organic social media post or running a free online webinar (well, arguably free—we’re not including time in this). In this case, your ROI is effectively 0%. 0% ROI would usually be a bad outcome, but in this case, it doesn’t portray the full picture.

So, ROI is typically reserved for investments with clear monetary sums.

How to calculate ROI

Calculate ROI yourself using this simple formula:

ROI Formula

There are a few different formulas you can use yourself to calculate the ROI of purchases for your business. However, this one is the easiest to use and understand.

How to calculate ROI on your marketing spend

Marketing spend is one of the most common ROI calculations used for businesses. So, let’s look at an example.

  • Say your business spends, or is looking to spend, $1,000 a month on marketing across your social and online channels. This includes social media ads, pay-per-click ads, and the like.
  • From this $1,000 spend, your monthly campaign ends up generating $10,000 in revenue.
  • Using the ROI formula: ($10,000 / $1,000) x 100% = ROI of 1,000%.

So, for every dollar you spend on your marketing you’re seeing $10 in profit.

But what if you’re looking at the ROI on marketing leads?

  • You spend $1,000 on a lead generation campaign. During this campaign you generate 100 new leads. This means that you’re spending $10 for every lead.
  • Your business makes on average $2,000 from each customer.
  • If you convert 3% of these new leads into customers (which is admittedly just 3 new customers), at $2,000 income each, that’s a return of $6,000.
  • ($6,000 / $1,000) x 100% = ROI of 600%.

Some useful tips for improving ROI

Outside of choosing the right assets and avenues for investment, improving your ROI comes down to refining how and what you sell.

Audit your sales process

Assessing your sales pipeline from start to finish will help you determine where your marketing processes falling short.

It could be as simple as adding a new call to action button onto a sales landing page. It’s been proven that a well-written, targeted call-to-action can convert 202% better than a generic ‘Buy now’-style button. 

Or, it could be as wide-reaching as overhauling your entire sales funnel and looking at where you’re putting your marketing dollars. For example, paid channels like Facebook and Google are usually the platforms with the best ROI. Is your business making the most of these channels?

Review your sales content

Following on from your sales process, ensuring you have the right sales content in place can make all the difference to your sales process.

And these days it’s not just words—what about video? In a 2020 study, 83% of marketers surveyed found that video content has helped them generate leads. In the same survey, 84% of consumers surveyed said that a well-produced brand video had convinced them to buy a product. Changing the type of sales content you use in your sales funnel can make a huge difference to your ROI.

Cut out unnecessary costs in your budget

One of the biggest ways to improve your ROI is to cut back on unnecessary costs. 

This may take some time, but it can make a huge difference. For example, you might look at finding a cheaper supplier for the product you’re looking to sell. Or, if you’re looking at your marketing holistically, it could be finding a more cost-effective internet provider or sales platform.

It can also mean looking at how you make your purchases and payments. You could be getting slugged with unnecessary costs simply for doing your banking. Fees such as excessive FX and international transaction costs, high bank accounts fees, and other similar expenses quickly add up.

Luckily, there’s a way to cut these costs for good. Airwallex uses innovative banking to help you improve your ROI.

ROI

At Airwallex we make it easy for you to break free of the limitations imposed by the big banks, with a range of better products that ensure you reduce the fees you pay for your banking. A simple fix like this can improve your ROI on making payments.

  • Our Global Accounts empower you to create individual wallets for 11+ currencies, allowing you to send, hold, and receive international currencies without the associated fees and avoid double conversion.
  • You can make international payments to 130 countries, in over 23 different currencies, with no minimum transfer fees.
  • Airwallex Borderless Cards let you instantly create physical and virtual cards for your business as soon as your account is approved, letting you make payments as soon as you need.
  • We don’t charge any monthly account fees, international fees, or withdrawal fees—ever.
  • We’ve also got some of the best FX rates around. We only ever charge 0.5% or 1% above the interbank FX rate, so you’ll receive the best rate possible and make a better return on your payments.

Now that’s a winning ROI formula.

This blog was written by Joe Romeo, who is a Senior Digital Marketing Manager. This re-post was authorised by Airwallex.