What is ROI? Formula to calculate ROI in marketing and finance

The term ROI often appears in company business reports, but not everyone clearly understands what ROI is and how to calculate ROI. Understanding the exact meaning of the index as well as knowing how to calculate it correctly will help you use ROI more effectively in your work. Let's learn this knowledge with 1C Vietnam in the article below.

1. What is ROI?

What is ROI ? ROI (Return On Investment) is the rate of capital recovery, return on investment, also known as profit rate. This is an important index that helps businesses measure the profit or performance obtained from an initial investment. ROI is intended to evaluate the relationship between initial costs and profits generated. The faster this index grows, the faster the business will be able to recover capital.

In the field of Marketing, ROI is a measure of the performance of marketing campaigns. Typically ROI will measure the contribution of campaigns to overall revenue growth. Based on that index, businesses can allocate budget for the next activities.

The ideal ROI for a business is about 5:1, meaning production costs only account for about 20% of the selling price. This index can be higher or lower depending on the business's cost of producing goods. There will be no fixed level to evaluate ROI. This index is positive, showing that business activities are profitable. The higher the ROI, the more profit and vice versa.

2. Meaning of ROI in business

Besides understanding what ROI is , understanding the meaning of this index for investors and businesses is also extremely important. The higher the ROI, the greater the profitability. From there, investors can evaluate the potential of projects. Businesses should continue to implement projects with positive ROI, eliminating negative ROI campaigns, which fail or do not earn profits.

However, investors should also note that the higher the ROI, the higher the risk. Therefore, investors need to coordinate ROI with other indicators for a more comprehensive evaluation.

3. Simple detailed ROI calculation formula

In fact, ROI only has a fairly simple calculation formula, but when applied to each field such as finance and marketing, more specific indicators are used. Let's find out below.

3.1 In finance

The formula for calculating ROI in finance is quite basic and easy to understand, clearly showing the relationship between the factors: ROI index, net profit and investment costs:

ROI = (Net Profit / Investment Cost) x 100

Suppose you earn $10,000 from $100,000, then your ROI is 90%.

3.2 In marketing

For the Marketing field, the ROI index is calculated as follows:

Marketing ROI = (Total revenue – Marketing costs) / Marketing costs

In addition to the above calculation, marketers also have another approach to ROI through customer lifetime value. This formula will evaluate longer-term ROI throughout the buyer lifecycle.

CLV = (Retention Rate): (1 + Discount Rate : Retention Rate)

Suppose the initial cost a business has to spend on Marketing campaign A is 50 million VND. When summarizing the campaign, measuring the revenue generated from the campaign as 250 million VND, the business can then calculate the ROI index of 400%.

4. How to effectively improve ROI for businesses

4.1 Appropriate budget allocation

First, businesses need to check whether the budget for projects and marketing campaigns has been allocated appropriately or not. Based on the calculated ROI index, businesses can determine which projects are effective and which projects are losing money to move budgets intelligently and bring the most profit.

4.2 Experiment with marketing channels

Not every campaign achieves a high ROI the first time. Therefore, businesses must always test different channels to find the most effective channel. Some popular channels today where businesses can easily calculate ROI are social media, direct response marketing, video marketing, email, and paid advertising. Implementing multi-channel marketing will help businesses understand which channels are receiving the best feedback. From there, marketers can build plans to enhance customer experience and increase their lifetime value.

4.3 Focus on evaluating important indicators

Based on the ROI goals and business goals set, businesses can choose metrics to measure campaign success. It is important that the numbers reflect the growth of the goals.

For example: A business chooses the goal of increasing revenue through website conversions. At the end of the campaign, the results recorded were a 200% increase in website visibility compared to the same period last year. That may be a very impressive number, but it doesn't fully reflect the conversion ability of this channel.

4.4 Use analysis support tools

With the strong development of Digital Marketing, all campaigns are now measured by different indicators. In many cases, if businesses do not know how to use analytical support tools, it can easily lead to data overload or incorrect conclusions. Marketing support tools can bring benefits such as:

• Data analysis.
• Audience segmentation.
• Personalized content recommendations.
• Follow up with potential customers.
• Handle repetitive tasks.

4.5 Plan to track ROI

The process of tracking indicators also needs to be clearly planned because they all influence each other. When there is a specific monitoring plan, businesses will understand where the problem lies and make reasonable changes. Let's say a company is running an email marketing campaign, which needs to track metrics like click-through rate, bounce rate, and open rate. If the email open rate is high but the bounce rate is also high, the business needs to change the content on the landing page. If the open rate is high but the click-through rate is low, there is a high possibility that the business needs to innovate email content.

The above article has compiled knowledge about what the ROI index is , how to calculate it, and what it means to businesses. This is an extremely important and necessary indicator, especially in the current era of multi-channel marketing. Hopefully you have gained useful knowledge for yourself. If you have any questions, please contact us, 1C Vietnam is always ready to support you.