ROI is a term you’ll hear thrown around in marketing circles. It stands for return on investment. It is most commonly used in the financial world, referring to the returns an investor might get on a particular investment, be it stocks, bonds, real estate, etc. But it can be used when discussing the results of any investment of time, money, or other resource.
In marketing, sometimes you will see or hear it referred to as ROMI (return on marketing investment). We measure the ROI of specific advertisements, campaigns, promotions, and other projects. To calculate the ROI, all you need to know are the inputs and outputs of a given project.
What were the costs? And what were the results?
As an example, let’s assume we want to figure out the ROI on a print ad campaign that recently ran in several local newspapers. The total cost of the ad space, as paid to the newspapers, was $5,000. The total cost for us to produce the ad was $1,000. So that’s a total cost of $6,000.
After analyzing the results of the campaign, using data collected from sales on the web, over the phone, and in stores, the campaign was directly responsible for $12,000 in profits. (Key point here, you want to use profits and not revenue when calculating ROI, otherwise you might think you’re getting great results when you could be losing money because of the cost to produce whatever you are selling.)
To calculate the ROI, use this formula:
(Profit – Marketing Investment)/Marketing Investment
So in our example, we take the $12,000 profit and subtract the $6,000 in cost, leaving us with $6,000. And then we divide that by the $6,000 marketing investment. $6,000 divided by $6,000, or 1.
And we usually use percentages when we talk about ROI. In this case, your ROI is 100%.
What is a good ROI? Well that all depends on your industry and what stage of growth you are in. As long as it’s greater than zero though, you can continue to do effectively use that strategy to grow.