Glosario: ROI

What is ROI? It stands for Return on Investment. Therefore, ROI is a formula that allows you to evaluate the profitability of a project or a campaign, as it helps you know how many sales are coming from the budget you set. It’s the relationship between investment and the profits generated.

Let’s look at it in practice. When you have a business, it’s normal to make an initial investment. For example, if you want to open up a burger joint, you have to think about rent, infrastructure needed and where to get it and lastly, ingredients and where to get them as well as plates, cups and employees.

When you finalise a sale, you’ll have gained something depending on various factors. For example, if you buy expensive ingredients and don’t manage to sell as many, your investment into each hamburger sold will be very expensive. However, if you use normal prices ingredients and sell many, you’ll make more profit.

How do you measure ROI?

ROI helps you put your cards on the table and know what projects are more profitable than others and so, allows you to make decisions. This helps you to optimise those investments that are working and either abandon or change those that aren’t.

In short, knowing what ROI is helps you to see if you’ve gained or lost money and is the time dedicated to a campaign was worth it. This way, you make the right decisions to improve results like optimising leads generation. ROI can be measured from a complete campaign on Facebook Ads all the way to the investment we put in posts or sponsored posts.

If you’re not able to spot whether your actions are profitable, really all you’ll be doing is wasting as much effort as you are money.

Learning to calculate ROI: a universal formula

Now that you know what ROI means, moving on to calculating it is quite simple: your total profits deducted from the initial investment, and divide that by the initial investment. This is what the ROI formula looks like:

ROI= (Profits – Initial investment) / Initial investment

If after calculating ROI you get a value below 0, it means that your investment has yielded negative results, that’s to say, that you’re not gaining any profit and that you’re actually losing money. On the other hand, is the result is positive, this means that your project is profitable and that you’re on the right path, but don’t let that fool you, as every project can always be improved upon.

If you want the result to appear as a percentage, multiply by 10.

What is the importance of Return on Investment?

As we said before, ROI helps you see if you’re making smart investments, as no company, no matter the size, likes to waste time and money.

Furthermore, if your company is looking for external investors, the data they’ll want to see first is ROI, to get a feel for how effective your campaigns are and that their money is well invested.

Once you spot the possible results with your different campaigns, it will be easier to forecast and create goals for future campaigns; real goals, tangible ones that are achievable. Knowing your limits is also part of what we have to learn.

One example is to take this into consideration when contemplating the cost per benefit of investing in a CRM or some other tool. Sometimes it can make us impatient to make an investment and have to wait to see results. By knowing what the ROI of our campaigns is and calculating it, we can also know how long it will take to see results and how long it will take for the following campaigns.