ROI Definition
ROI (return on investment) is a measurement of the income attributed to a specific marketing activity minus how much the marketing activity cost.
ROI is represented by a percentage and calculated with the following formula: (income – cost) / cost * 100.
A high ROI means that the marketing activity was successful. Companies use ROI to help them decide where to most effectively spend their advertising dollars.
ROI Example
A business decides to run some pay-per-click ads to promote their products and services. Their goal is to determine which websites are the best to advertise on for their company. To decide, they run a test campaign on Facebook, LinkedIn, and Google each with a budget of $1000.
Their Facebook ads get a lot of views and clicks but don’t bring any sales. The LinkedIn ads didn’t get as many views or clicks but they are able to attribute $5,000 in sales to the platform. The Google ads also generated $2,500 in sales.
Let’s calculate the ROI for each of these examples:
- ($0 – $1000) / $1000 * 100 = –100% ROI
- ($5000 – $1000) / $1000 * 100 = 400% ROI
- GOOGLE ADS
- ($2500 – $1000) / $1000 * 100 = 150% ROI
Based on the ROI of each of these marketing channels, the company decides to continue advertising on LinkedIn and Google but not on Facebook.
Why is Understanding ROI Important in Strategic Marketing?
- Strategy
- ROI determines whether or not your marketing efforts are a success. A low ROI means the marketing campaign is not performing well. To improve the results, adjustments may need to be made to the strategy.
- Continuous Improvement
- ROI is a metric that can be continuously improved. By paying close attention to ROI, a company will learn what is working and what can be improved in future campaigns.
