ROI Meaning - How To Calculate Return on Investment (2024)

Return on investment (ROI) is a straightforward metric that can give invaluable insight regarding your potential profit on a specific investment. Calculating the ROI of each of your marketing campaigns can help you improve your strategy and ensure that you are always making informed and profitable decisions.

It’s a key performance metric used by e-commerce brands to measure the efficacy and impact of their digital marketing campaigns and is used as the north star for keeping them on track for overall business and financial goals.

However, for many, ROI calculations can be too generalized and not provide the context needed for precise decisions.

In this article, we will explore the importance of ROI calculation, how eCommerce businesses are using it to make headway, and how you can effectively calculate ROI yourself.

What’s ROI

ROI is one of the most effective methods of evaluating the efficiency and profitability of an investment that you made. Investors can also use it to compare assets and determine where exactly they played their cards right.

It is simple to calculate, and the sheer amount of information investors and businesses can collect is the main reason why ROI is heavily relied on. ROI calculations come with benefits in droves; however, there are some limitations that you should be aware of.

For instance, when performing an ROI calculation, you only take the return and the cost of investment into account, but not the holding period. So, to put things into perspective, opening up your ROI calculator and seeing that you made 180% ROI in 2 months sounds very good. However, if you made 180% ROI in 10 years, well, it might not sound as good. That’s why it is important to calculate these metrics within the context of specific activities, and defined timelines for an accurate picture of success.

Businesses, especially eCommerce ones, constantly create marketing and promotional strategies to boost their sales, and each time, they expect high and quick ROI on their initial investment. But let’s elaborate on the weight and reasoning behind this heavy emphasis when it comes to e-commerce.

Why is ROI Important for eCommerce

Each eCommerce business creates strategies that promote its product(s) and to are intended to drive customers toward making a purchase.

Unfortunately, the statistics show that many eCommerce businesses fail after their first year, which only makes it more important that you take the time to create a sound business plan and use data-based marketing decisions to scale.

With the help of ROI, eCommerce businesses can calculate their current marketing efforts’ profitability and performance, test new channels and marketing incentives, and grow their business organically. That being said, not checking your ROI while running an eCommerce is equivalent to walking through a jungle without a compass. You won’t know what worked and what didn’t if your resources are being used effectively and worst of all, why your customers are purchasing.

How to Calculate Return on Investment

Now that we have discussed the importance of this metric, let’s look at how you can calculate the ROI of your investments.

To effectively calculate ROI, you can use this ROI formula:

• Net Income / Cost of Investment x 100 = ROI

Another effective formula for ROI calculation is:

• Current Value Of Investment – Cost of Investment / Cost of Investment = ROI

“Current Value Of Investment” refers to the profit you obtain after the sale of the asset or the funds obtained on the shoulders of that particular strategy you employed. After you do the calculations, you will be left with a percentage. This percentage is your total ROI.

Let’s look at these two examples to give you a better idea regarding the process of ROI calculation.

An individual purchases a rare digital coin for $400; after its sale, they receive $1400. It’s plain to see that the individual netted $1000. And, if we use an ROI calculator, we can see that the individual’s initial investment had a potential ROI of 350% – for the sake of simplicity, we excluded fees and commissions in this equation.

Still, as we mentioned above, remember that ROI calculation doesn’t take the period of time in which an individual holds the asset into account, so even an ROI of 350% can be bad for investors who don’t want to play a long-term investment game.

Basic eCommerce ROI Calculation

Calculating ROI for your eCommerce businesses is pretty straightforward. However, since marketing strategies are robust, there are a lot of factors that you have to pay attention to.

SEO and paid ads are incredibly important for eCommerce stores. This is because it helps them rank higher on search engines and gain a lot more traffic. However, this does not come without a cost, and with each cost, it’s normal for businesses to expect some sort of return.

So, to effectively calculate these investments, should first pinpoint how much you invest for the strategy.

For instance, if you allocated $4000 for SEO endeavors and $400 for paid Google ads and you only acquired 30 new customers via SEO and five via paid Google ads, your ROI results should look like this:

1. SEO: ((30 x 100 – 4000) / 4000) x 100 = -25% ROI
2. Paid ads: ((5 x 100 – 400) / 400 x 100 = 25% ROI

The numbers in the first example indicate that your SEO efforts are not performing well and your paid ads campaign is bringing in significant results. Well, that is all great in theory, but not in practice. When calculating ROI, it’s important not to forget about Customer Lifetime Value. So even if your ROI is negative, your SEO strategy might be valuable.

So, if your average Customer Lifetime Value from SEO is around $12.200, you can apply the following formula to determine your strategy’s efficiency:

((12.200 – 4000) / 4000) x 100 = 205%

The numbers suggest that your SEO strategy is bringing in a lot of profit for your eCommerce business and, therefore, should not be sidelined.

How to Interpret ROI Calculations

Businesses and investors trust the return on investment calculator results as they are generally always correct and straightforward to interpret. So, if the ROI is net positive, you should proceed with your current strategy. On the other hand, if it’s negative, it might be time for some much-needed changes.

However, as outlined above, in some instances, a negative ROI doesn’t have to mean that your strategy is not sound.

So, suppose you want to pinpoint whether an investment or a marketing strategy has brought you profits and whether you should continue on the same path, what percentage of ROI should you look for? As a general rule of thumb, you should look for at least 7% net positive ROI (annually) on a particular investment project.

What is ROI Used For

So to understand why ROI is important, you will have to have a firm grasp of what ROI is used for. ROI can help investors and businesses compare the financial feasibility of project and marketing strategies, helping them eliminate methods that don’t perform and find adequate alternatives.

Businesses and investors turn to their return-on-investment calculators when they are:

• Calculating the profitability of a particular asset;
• Evaluating their marketing campaign’s performance;
• About to kick off a brand new project;
• Compare the effectiveness of their online promotional campaigns;
• Quantifying financial payoffs from annual investments;

Increasing your eCommerce ROI

Increasing the ROI of all eCommerce marketing activities is at the top of the to-do list for every online business. To achieve this, you can employ various onsite marketing tactics to ensure that every effort you spend driving traffic to your site, has a subsequent on-site experience to follow it up giving visitors the perfect customer experience.

Using the right set of tools can transform your website into a conversion machine which will ultimately increase the ROI of your marketing efforts. To do this, you’ll need to use an onsite messaging and personalization platform that shows the right message to the right visitor at the right time, driving them to convert. And the way to do this? Pop-ups and other forms of onsite messaging.

The beauty of popups is that they are no longer a nuisance, but are the secret weapon that can help take your website experience to the next level. From building SMS/email lists to serving product recommendations, even greeting visitors based on their referring traffic source—their uses are nearly endless.

One of the most effective strategies for using pop-ups to improve the ROI of offsite marketing is for your PPC marketing campaigns. Setting up UTM-based welcome messaging will help you ensure you’re not paying for dead-end clicks and turning anonymous traffic into known subscribers.

Benefits of eCommerce ROI calculation

By keeping a close eye on your eCommerce ROI rates, you can recognize top-performing marketing campaigns, make adjustments when your ROI calculator shows negative net numbers, and, most importantly, grow your eCommerce business with the help of data that shows you what works and what does not.

Bottom Line

There are various vanity metrics, but ROI is not one of them. Instead, ROI gives businesses and investors the proper insight, helping them make sound decisions and shape their activity on the market. By now, you ought to have mastered the basics of what return on investment is and how you can effectively calculate it.

If you are interested in personalizing your eCommerce store and improving the ROI of your offsite marketing campaigns, start a free 14-day trial of Jsutuno to see just how far an optimized website can take your e-commerce business.