ROI, or Return on Investment, is a very important metric for those who invest in advertising as it allows you to evaluate the effectiveness of an advertising investment: what it is and how it is calculated
The ROI or Return of Investment , is one of the most important metrics in the field of Digital Marketing, because it is an index that allows you to evaluate the effectiveness of an advertising investment . What is often referred to in Italian as “ Return on investment ” can be used to measure a wide range of types of investments, even if it is not always easy to calculate. This guide is for anyone who wants to know exactly what ROI is and how it can be calculated accurately.
What is ROI or Return of Investment and why it matters
The acronym ROI, as already mentioned, stands for “Return of Investment”, in Italian translatable as “Return on investment” or with the formula “Return on investment index “.
It is, in fact, an index that measures how much it was possible to obtain from a given activity net of the investment that was necessary to carry it out.
As mentioned, it is a fundamental metric in the field of Marketing as it is explicit and makes it very clear whether an investment is profitable or not. This index also allows you to compare the effectiveness of different Marketing investments, allowing in light of this also to choose only the best (i.e. the most profitable) and to divide the budget between SEO, website and other online marketing tools and offline.
How is ROI or Return of Investment measured
The ROI or Return of Investment formula is relatively easy to memorize, even if the implications connected to it can be multiple and make the precise calculation of the profitability of an investment more complicated.
It consists of the ratio between the so-called ” derived profit ” (ie the difference between the “amount earned” and the “amount spent”) and the ” invested capital ” (i.e. the amount spent), all multiplied by 100 . The ROI formula, in fact, is generally expressed in percentage terms .
By ” amount earned ” we mean the total revenue generated by the investment: in the event that an advertising campaign has generated 100 sales, for example, we must consider the total amount obtained from those same sales. By ” amount spent “, on the other hand, we mean the total sum of all the expenses necessary for the investment.
There are many variables that can influence and, therefore, complicate the measurement of the ROI of a Marketing activity. In an advertising campaign, for example, more than one channel can be involved and it can therefore be difficult to accurately attribute a sale to a specific channel. Customer purchases are often the result of a long journey and can only rarely be linked to a single business. Measuring ROI is even more complicated then, in particular, for some specific campaigns, such as those aimed at Brand Awareness, which do not have an immediate return on investment.
To overcome these difficulties, it is possible to evaluate some precautions: specifically, it is advisable to calculate the ROI separately for each channel and calculate the ROI over the medium or long term, taking care to track all the operations, even those offline . For some activities, in fact, what in the short term may seem an unprofitable investment, could instead turn out to be an excellent opportunity over a longer period of time.