Return on Investment literally means the return of the investment; that is, capital. The ROI is thus a calculation parameter or an entrepreneurial key figure that provides information about when an investment paid off or whether it is profitable. One also speaks of return on capital, return on investment, or profitability. The profit is set in relation to the capital invested to determine how profitable investments were – or for future investments. The ROI is calculated from the determined or calculated share of profit and the required capital investment over a certain period of time.
Return on Investment (ROI) describes the relationship between investment and profit. The value should show to what extent an investment was worthwhile. In online marketing, for example, the financial success of a campaign can be traced.
Calculation of ROI – Return on Invest
ROI = profit share through capital investment (over one year) ROI = 2,400 divided by 2,600 ROI = 0.92
Since the investment or the capital investment (oven) and the profit (8 cents per roll) can be clearly and causally assigned to each other, the return on investment is easy to calculate. For example, two different ovens with different capacities and prices can be compared easily and simply with regard to their profitability. The oven that can achieve the same (or higher) profit in less time is the more profitable oven with higher ROI. Then there is only hope that the additionally produced rolls can all be sold.
The relationship between investment and profit is not always as clear and unambiguous as in our example with the baker and the new oven. If there are more complex facts and relationships, a causal relationship between costs and benefits is not always so easy to identify. Often, the situation of not clearly allocating administrative costs to an investment or there are other costs that cannot be clearly allocated. When the impact of indirect or general costs increases, the reliability of the ROI as a measure of profitability decreases.
Some of the related Marketing Terms and Their Definitions along with guidelines for the readers who want to reach deeper information:
- Return on Capital Employed and Definition
- NeuroMarketing and Definition
- Flywheel Marketing Definition
- Eye-tracking Definition
- Community Management Definition
A Return of Investment Example from Real Life
ROI is of course not only for Online Marketing, but it is also actually firstly used in the real brick & mortar businesses. Below, you may find an example of this.
Example: A baker wants to buy a new oven. With this new oven, the baker can bake and sell 100 rolls a day more than before. The profit per roll sold is 8 cents, the baker increases his profit (if he can sell all rolls) by $ 8 every day that his bakery is open. His bakery is open 25 days a month, which means an additional profit of $ 200 per month or $ 2,400 per year. The new furnace costs $ 2,600. The investment in the new furnace has paid off or paid off after 13 months ($ 2,600 more profit). The money that the baker spent on the oven completely “returned” to him after 13 months and the additional profit is clearly attributable to the new oven.
The ROI in online marketing
In relation to online marketing, the ROI relates to the relationship between advertising costs and the profit made. This allows the financial success of advertising campaigns to be measured precisely. The prerequisite is, of course, that the necessary data is tracked, i.e. the conversion rates.
The ROI is calculated using the following formula:
Profit / turnover x turnover / total capital x 100%
In online marketing, this calculation is also known under terms such as ROMI (Return on Marketing Investment) or – especially for search engine marketing – ROAS (Return on Advertising Spendings), since visitor tracking can be tracked here using web tracking. Therefore, this calculation is also somewhat simplified, namely by putting the advertising costs in relation to the profit:
Revenue – total / advertising costs
Total costs include all activities or investments that were incurred for the product before it was sold. This includes manufacturing costs, purchase costs, or marketing costs, such as the placement of AdWords ads.
Example of AdWords ads:
In a shop, 3000 Dollars are required for the purchase of products, which generate sales of 5000 Dollars via AdWords ads. AdWords spend is $ 500. This results in the following calculation:
5000 Dollars – 3500 euros / 500 Dollars= 3 Dollars
The value “3” means that you made a net profit of 3 Dollars from a bet of 1 Dollars.
What role does the Return of Investment play?
On the one hand, you can use the ROI to see whether the campaign was financially worthwhile, on the other hand, you can use it to identify the positions that were particularly profitable or particularly cost-intensive within the campaign. You can adjust future campaigns accordingly.
With advertising measures such as AdWords, the value can still be determined quite precisely, since the focus is on click costs (CPC). However, it becomes more difficult with the ROI for SEO measures. Here, sales cannot be clearly attributed to certain SEO measures, as when clicking on an advertisement, since the success of the measures can only be determined over a longer period of time and the time, which is also associated with costs, is not factored in.
For an entire online marketing campaign, it is quite possible to calculate financial success using the ROI, namely on the basis of a fixed budget, which is often set for such campaigns. If the path of a customer to conversion can be traced back to campaigns in this campaign, it can also be “booked” as exact turnover. However, a realistic ROI can only be determined if:
– All marketing channels used within the campaign are included in the budget
– the customer’s path – the customer journey – is tracked
– exactly what a conversion in the campaign means
The return on investment reflects the relationship between investment and profit. This consideration can be used for individual investments, but also for the profitability of an entire company.
What is the Relationship between Return of Investment and SEO
Holistic SEOs should be people who calculate the ROI for their customers. This is not only related to the SEO but also a PR Campaign or AdWords Campaign can be calculated in terms of ROI by an SEO. A Holistic SEO is no different than a Growth Hacker. A Customer can trust a Holistic SEO in many ways such as the code structure or the marketing strategy, content’s grammar, or community management. A Growth Consultant can increase the efficiency of a customer’s budget spending via his/her vision. Also, SEO is a long-term project. Some customers can be impatient for seeing the results of the projects with a classical ROI Understanding. In addition to this, there are some SEO Campaign elements that can’t be calculated in a classical ROI Calculation methodology such as PR or Natural Link Building processes. These kinds of steps create a permanent Brand Value in long term which helps ranking better.
ROI is related to the SEO for giving customers a realistic perspective to the ROI of SEO Project and also for giving a consultancy to increase the budget efficiency for a holistic digital marketing strategy. As Holistic SEOs, we will continue to improve our ROI Guideline as the new practices, examples and theories come up.