Return on Investment Calculation (How to Calculate ROI Using Formulas?)

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Marketing is the only means nowadays that helps to boost your brand acknowledgment and increase your selling funnels by getting more and more loyal customers. This post is dedicated to small and big enterprises and individual businessmen who are investing in different business projects or are into marketing sphere (context advertising and other sales promotion means). Here you will find the detailed information about ROI index that is one of the most important parameters in the business world.

Every single advertising channel (context advertising, offline banners, handouts distribution and so on) and some of the business projects, for example, start-ups, projects aimed at modernization seek the constant return on investment index tracking.

Return on investment definition

ROI (return on investment) is the coefficient of investment return, an index of your input cost-effectiveness. It shows either the profitability of your business (if the number exceeds 100%) or the state when your firm or start-up is running at a loss (the number is under 100%) concerning the sum to be invested into the project.

The following data is needed to perform the calculation:

  • The prime cost of the product (or the service) implies all the expenses to buy the spare parts of your final product, its production, the payments for the storage and logistics, the salary to your staff, etc.
  • The revenue is a closing gain you receive after the product is sold or the service is rendered.
  • The amount to be invested is the total sum of the money that acts as the investment, for example, the advertising budget, and so on.

What is the formula for return on investment?

There is more than one formula to analyze the ROI index. Let’s begin with the easiest one and the most popular. It is widely used by the majority of Internet market managers and the owners of Internet e-commerce platforms.

ROI = (revenue — prime cost)/amount to be invested*100%

When we subtract the prime cost from the revenue, we receive the closing gain, our actual earnings. The relation of the closing gain to the total sum invested shows how much the first sum is bigger than the other one. For the sake of convenience let’s multiply by 100%. If the sum we get in the end is less than 100, it means that our investment has not returned.

In case you want to add one parameter to this ROI formula, you will get the other type of return on investmentcalculation that is widely used by the financial circles to analyze the investment in a particular time period.

ROI (period) = (sum invested by the end of the period + revenue for this particular period — invested sum)

This is the precise ROI formula to calculate the yield of the holding period. Thus, you get a real figure of the total investment by the end of the period.

If we take into consideration small and medium-size businesses, the two ROI formulas mentioned above are more than enough. Although there are a lot of ROI business tracking tools that we are going to discuss right away.

Modern factors to take into consideration to track ROI

Due to the various up-to-date internet-analysis systems, it’s not that hard nowadays to get very precise ROI data. Though it’s not an easy process but at the same time, not the toughest one. Below I’m happy to share a couple of tools featuring different levels of complexity while tracking the return on investment to go into the depth of business analytics and making sure that your investment is working for you.

ROI tool No.1: Toggl install

When we talk about Internet marketing everyone realizes that high-quality marketing becomes possible with the good content. But how to implement ROI calculator into the sphere of content creation?

Toggls is a great Chrome extension tool to calculate the time you spent on content writing. Another good point is that this extension is matching many online tools: Github, Asana, Gitlab, Worksection, Podio, etc.

ROI tool No.2: Figure out the metric

To determine the return on investment you have to figure out what is the metric to be taken into the calculation and how this metric impacts your whole process of revenue generation.

Online Sales

For example, you have an online shop that sells books, so your metric could be single book sale revenue. To boost the sales you have to implement CTA (call-to-action) at the bottom of your blog to lead the visitors to the selling page. To calculate ROI you use the website analytics and calculate how many books you sold. This goes for a small retail activity as the bigger scale seeks for more actions.

Lead Generation

This example works with the owners of websites who isn’t actually selling but more tend to generate leads. To receive the needed result one has to organize marketing campaigns and focus on the leads.

In this case, you could base ROI calculation on the parameter of lead generation; the other way is simply to calculate the revenue.

How do you calculate return on investment?

The ROI formulas mentioned above could be easily used to calculate ROI for a singled out advertising channel, a number of them, per one product or the product category.

Let’s set a return on investment example. There is a toy store in Atlanta, GA and the most popular three toys are a panda, a bear, and a rabbit. The data on the sales received could be presented in the following table:

Advertising campaign Expenses Amount of orders Prime cost Revenue ROI
Panda 22.25 8 5 8 107.86%
Bear 35.5 9 5 9 101.40%
Rabbit 22.48 7 3 7.6 135.23%

When we take the panda data it’s easy to show how ROI formula worked:

ROI=(8-5)*8/22.25*100%=107.86%.

Though bears bring maximum revenue it’s better to sell rabbits because they show higher ROI, and bears in their turn are hardly paying themselves off. As you see, fixed primary cost and the revenue from the sale (the consumer price of the product) were used.

ROI tracking should be held regularly to track the indexes and see whether they are soaring or going down. This will be beneficial to your business and you’ll keep your eye on the ball and will be ahead of the rivaling businesses. Be smart and act smart!

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