Return on Investment: What Is It and How To Calculate It

When you spend money on something, an investment or business cost, return on investment (ROI) helps you understand how well a particular investment has performed, based on how much it cost and how much you earned back.

By the end of this video, you'll learn how to calculate ROI, whether we always need to know ROI and how to calculate it for brand building strategies.

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Transcription:

So how can we calculate ROI in digital marketing?

Okay, so the standard formula for return on investment is the profit that you make from a campaign divided by the amount of money you've spent, times a hundred. So a pretty standard formula.

So if you’re ecommerce, that'd be pretty easy, but what about other organisations?

Yeah, so for ecommerce, it is easy because you can see how much money you've made and you know how much money you've spent. The thing is, most of us aren't e commerce organizations, the majority of organizations aren't. So if that's the case, you then need to go through and think what your desired outcome is.

So we might say it’s lead generation, but if that's the case, I'm going to look at how many leads I've generated, but I then need to assign an average value per lead, so I'll need to know how many of those leads actually converted into business, what was the value of that business, and then I can go through and I can work out average value per lead.

So how can you calculate ROI when you're brand building?

This is the big thing, right? So if I'm trying to build a brand and I want you to do something that's kind of non tangible, watch a video to the end or something along those lines, this is where we start getting into kind of trickier territory because what you're normally going to do then is a proxy for success.

I think someone that watches that video to the end is more likely to do the thing I want them to do. I think that somebody that reads this article to the bottom is more likely to do the thing I want them to do. Now, the problem is you might be doing that because you want them to walk into a shop or a dealership, but you might be doing it because you want them to change their behavior.

And then how do you put a value against that? So you start getting into territory where you go, are we just arbitrarily putting a financial value on something? Or the other way of doing it is you look at how much does it cost us in other channels to achieve. What's the most cost effective channel to achieve those things. You can look at it slightly differently.

So do we always need to calculate ROI?

You don't, but it just depends how you're driven as an organization. If your finance director is coming to you and going, yeah, what's the return on investment of this? Then you kind of have to answer that question. Other organizations, it's like, I’m comfortable with the fact that we've got all these people doing this thing over here and that's leading to more people doing something over here. So the culture of the organization is going to have a big impact from that point of view.

So, that's where it gets a little bit more challenging. T bigger the organization, the more of a challenge it is. We often look at things in our own bubble, but actually when you're doing this for a business, you need to look at ‘what are the overall cost variables in what we're doing’ and ‘how do we attribute that?’

So the bigger the organization, the more complex is, but it's well worth taking a step back and going, okay, what are the costs? What variables are there that we could play around with? Once you've got those and you've got a calculation that's running on them, you can start tweaking any one of those and, and seeing whether you get a better outcome, you know, maybe we need to spend more on just general PR because actually when we do that, we see over a period that actually things improve.

And I think that's why sometimes conversations with financial directors can be really helpful with this because they've got their fingers all over all of these different financial levers that happen to be around. You can work out a really good calculation that everybody can kind of rely on and move forward with.

It's also a thinking about the fact that we're trying to look at kind of numbers to measure things. And the reality is there might be something quite intangible happening at the other end of it, like a behavioral change thing. So what you're just trying to do is optimize what you've got.

But what you hear a lot of is people saying, well, I can't do any paid search because you have to pay for it. But, you're still paying for the organic stuff because you're spending the time and effort creating the content, and you've got a member of staff that you're paying for. So those are still costs. So I think we need to think about all of those different costs and then try and work out return on investment based on that.