How To Calculate Your ROI (Return On Investment)

Calculating the ROI (return on investment) of a campaign tells you whether it made sense to do it &, more importantly, whether it makes sense to continue. If you’re running several campaigns (or, for example, advertising on several sites) it can also tell you where to place your marketing budget.

How Do You Calculate ROI?

ROI is best calculated by looking at the profit you’ve made from a marketing campaign (or channel) vs the total amount you spent on that campaign/channel. (you can get more complicated by factoring in the costs of having money tied up, etc, but for now we will keep things simple)…

So here’s an example: You & I have just set up a goat-shaving equipment website at www.goatshaving.com & We’re advertising it via AdWords. We’ve set up a little report to monitor the costs of advertising on AdWords, along with our AdWords-generated revenue (total takings) & margin (total takings minus all costs other than our advertising costs). At the end of the week our spreadsheet looks like this:

Figure 1: What’s our Return on Investment for Week 1 through AdWords?

The final column, ‘ROI’ is calculated by taking our margin, dividing it by our ad costs & representing it as a percentage. If you’re using a calculator you’d do that like ((margin / ad costs) * 100). If you’re using excel, you’d just enter the formula “=D2/B2″ & then hit the % sign & then copy/paste the formula down the rest of the column.

A Couple Of Important Things To Remember

• When calculating your margin, make sure you factor in all of your costs & overheads (or take account of those somewhere else in the calculation). For example, if you lose money on shipping costs (or gain money) make sure to factor that in. The exception of this (for our purposes) is that we leave our ad costs out of this. That’s because we’re specifically trying to measure our ad costs vs our ad returns.
• Only include revenue/margin made as a result of your advertising. If you’re factoring in other sales here, you’re not giving yourself a true picture of the return your advertising is generating.

How Does Calculating Your ROI Help You?

1. It Helps You Predict How Much Money Your Budget is Going to Make for You in Future

If a particular channel consistently provides you with 114% ROI, you can calculate how much money you’re going to make from that based on any budget (until you’ve expended the entire available volume of advertising that is!). Lets say you put a 2000 gold coins into advertising in the channel, if the ROI is consistently 114% you know you’re going to come out with 2280 gold coins.

2. It Allows You to Compare The Value of Various Marketing Channels

Lets say instead of just advertising our goat shaving business on AdWords, we’re also going to advertise on MSN & Yahoo. At the end of the week, we put together our little ROI report & it looks like this:

Figure 2: Is the money we’re spending with AdWords, Yahoo or MSN making us the most money?

What lessons could we learn from that?

• We should probably spend as much of our budget as we can with MSN, then put what’s left over into AdWords
• If we’re going to stick with Yahoo, we’ve got to do something to improve our campaign as we’re losing money right now (maybe we’d improve the creative, maybe we’d reduce our bids, maybe we’d try to improve our landing pages, etc)

3. It Lets You Measure Whether Changes To Your Campaigns (or your site) Affect Your Results

Looking again at our AdWords example, let’s say at the end of Week 1 we spend a few hours improving the quality of our ads & our landing page. After another week, we put together a little report to compare Week 1 (before our changes) with Week 2 (after our changes) to see whether they improved our results

Figure 3: Has our AdWords campaign yielded better results in week 2?

Summary

That’s it – those are the basics of ROI calculation & a few examples of how you can use it to monitor the effectiveness of your campaigns & make the most of your budget.