What is ROI and what nuances should you consider when calculating it?
We’ve already talked about one important metric for business: the lifetime value of a customer, or LTV. In this article, we’ll tell you about another important indicator: ROI. With it, you can identify effective channels to attract customers and, as a result, more wisely manage your budget for advertising campaigns.
In this article, you’ll find answers to the following questions:
- What do ROI, ROMI, and ROAS stand for? Are they different metrics?
- What’s the formula to calculate ROMI and ROAS?
- Why do you need attribution to calculate these metrics? What other nuances should you consider when calculating ROI?
- What tools can you use to automate these calculations?
- How can you efficiently allocate your budget and increase revenue from ad campaigns based on ROI data using OWOX BI?
- What’s considered a good ROI? How can you use these metrics to make business decisions?
What is ROI?
Return on investment (ROI) measures the revenue attributed to a particular investment.
From a marketing point of view, ROI can be divided into two metrics: ROMI and ROAS.
Return on marketing investment, or ROMI, is used to measure the overall effectiveness of marketing and help marketers make better decisions about allocating future investments. It’s calculated as the ratio of revenue from marketing efforts to marketing costs (salaries, etc.).
Return on advertising spend, or ROAS, is typically used to evaluate the effectiveness of a specific campaign, ad group, ad, or even keyword.
ROAS is an incredibly flexible way to evaluate any aspect of your online marketing. Want to know if a particular ad set is worth your time and money? Check your ROAS. Want to know if those targeting changes you made are working? Check your ROAS.
Mostly, ROI is expressed as a percentage, but it can also be expressed in the form of a coefficient.
What’s the formula to calculate ROMI and ROAS?
Let’s look at an example for a better understanding of how to calculate ROAS.
Imagine you sell a product through your site. You have a budget that you’re willing to spend on Google Ads. Suppose it’s $1,000 per month. You launch a campaign, everything is going fine, and by the end of the month your income from advertising campaigns is $6,000.
General formula for calculating ROAS:
ROAS = income from ad campaign / cost of ad campaign
Calculating ROAS based on our example: $6,000 / $1,000 = 6
What does this mean for you? Well, it means that for every dollar you spent, you earned $6 in profit. Not bad for advertising on just one channel.
Following the same example, to calculate ROMI, you need to include salaries and all associated marketing costs. For example, say you paid $200 for a PPC specialist to set up this ad plus $50 to the copywriter who wrote the ad.
General formula for calculating ROMI:
ROMI = (income — costs) / costs × 100%
ROMI calculation: ($6000 — ($1000 + $200 + $50) / ($1000 + $200 + $50)) x 100% = 380%
At first glance, ROI is a simple and understandable indicator that can be calculated without problems, but there are a lot of nuances to keep in mind.
Nuances when calculating ROI
1) Choose the right attribution model to make accurate calculations.
In a simple case, a user clicks on an ad and makes a purchase. This revenue clearly belongs to the ROAS calculation we’ve mentioned above. But what if the user clicks but doesn’t buy right then? What if someone clicks on your ad, goes to your website but closes it, then three weeks later sees a post for your product on Facebook, clicks on it, goes to your website, memorizes the URL and closes the site, and then a month later goes directly to your website by typing in the URL and makes a purchase? You could argue that this customer should be counted in the ROAS calculation for the initial ad because they first found your store via that ad campaign. Or you could argue that the Facebook post should get the credit since that was the last click before the purchase. A third option would be to split the revenue between the initial ad and the Facebook post.
The attribution model you choose determines how much credit your initial ad gets for this customer. What’s important is that you pick a single attribution model and use it consistently when comparing ROAS across channels and campaigns.
To objectively distribute the value of an order, it’s necessary to evaluate not just the last session but each buyer session. This is why we suggest that our clients use a ML funnel-based attribution model.
Take a look at the report below that we built for one of our clients. We discovered that the value (revenue from orders) assigned to advertising channels as a result of ML funnel-based attribution was different from the value assigned using the last non-direct click attribution model. If you use the last non-direct click model, your ROAS will differ from the real-world numbers.
2) Take into account all factors affecting revenue.
Let’s give a couple examples of things that might affect revenue.
- Your best sales manager has switched to another company.
- You’ve changed a supplier, affecting the timing of delivery for certain goods. At the same time, you’ve launched an advertising campaign and have many potential buyers — but there are no goods available. As a result, you have decreased ROMI, but this has nothing to do with advertising and marketing.
For a real-world example of the importance of a ML funnel-based attribution model, read our case study about how the insurance company INTOUCH built an effective advertising campaign evaluation system and optimized advertising costs by automating the collection and processing of all necessary data.
3) Account for differences in costs (hard to calculate the average check)
Imagine this. Last month you paid $100 to ship an order to Europe. But this month, your shipping service has raised their prices and now you need to pay $100 for shipping to US customers and $200 for shipping the same product to European customers. Or perhaps your customers preordered some expensive products due to an ad on Facebook. As a result, your ROMI may decline, although your marketing department is doing everything correctly.
4) Don’t forget about the full sales cycle.
For some transactions, the customer takes several months to make a decision. The customer could interact online with your advertisement in January and make a purchase offline in March. Or your customer could pay on your website. The transaction will be counted after receiving a bank confirmation, which could take a couple of days. In such a situation, the transaction won’t be attributed to the correct session, which means the source that led to that transaction won’t be evaluated correctly and the ROAS won’t be correct.
Therefore, you need to find a way to combine data from different channels, taking into account the full sales cycle — even if it lasts for half a year.
The sessions data collected with the new OWOX BI algorithm has a maximum duration of 30 days. You can also choose a start date and upload historical data for a period of up to 6 months.
Plus, OWOX BI recognizes UTM tags in your ads and imports data in the correct format to link your cost and revenue data. This allows you to give proper credit to your costs, CTR, CPC, and ROAS for all traffic sources, in a single interface.
What tools can you use to automate these calculations?
Keep in mind that manually calculating ROI and rechecking for possible errors requires a lot of time and effort. We’ve compiled a list of the most popular tools to calculate it automatically.
Google Analytics is a suitable and simple option for calculating ROAS for Google channels.
But when using other advertising services (Yandex.Direct, Facebook, etc.), you need to import data from them into Google Analytics. This can be easily done using OWOX BI Pipeline. Comparing the ROAS of all traffic sources, you can draw conclusions about the payback of a particular channel and redistribute your budget.
Also, note that in Google Analytics you can select only a limited number of attribution models, the default being last non-direct, so not all transactions can be taken into account. Especially if there’s an offline sale.
Another favorite method for many marketers to calculate and visualize data on expenses, income, ROI, ROAS, and ROMI is to manually upload data from Google Analytics to Google Sheets, make some small calculations, and build final tables. But keep in mind that Google Sheets has some technical limits if you upload a lot of data at once.
OWOX BI Smart Data
With OWOX BI, you can analyze your campaigns more deeply and automatically compare ROAS and ROMI, displaying results on a dashboard in Smart Data, Google Sheets, or Data Studio. As a result, you’ll be able to make conclusions about the payback of a channel based on complete data and will be able to properly distribute your budget.
In order to have a complete picture while comparing ad channels, you need to
- set up data transfer from advertising services (Facebook, Criteo, etc.) to Google Analytics via OWOX BI Pipeline, combining this data with behavioral data from your website
- configure OWOX BI Attribution
- build the necessary reports in OWOX BI Smart Data
In the Results tab of OWOX BI Smart Data, there are several predefined reports:
You can find more reports in the Smart Data service itself and in the support section.
What’s considered a good ROI?
So you’ve realized the importance of calculating ROI. But what should you do with the data you receive? What ROI is considered good and what’s bad?
For different businesses, the figures are different: some businesses can make money with a very low ROAS; others may need a relatively high ROAS to avoid losing money on digital advertising. But one rule stands for all: ROI must be positive (above 100%).
By observing the dynamics of ROI changes in reports, you can redistribute your budget to more effective advertising channels. In the example below, we see that the company spends more on Google AdWords than it gets in return. So spending on Google AdWords should be invested, for example, in the Google organic channel in order to increase revenue through this more effective channel.
Measuring the return on marketing and business investments is a must. These metrics will help you find out where you really should invest in order to earn more. You should start setting up data collection and calculating ROI from the moment you start thinking about business and marketing costs.
When calculating ROI, you need to:
- Choose the right attribution model
- Define your income and costs
- Consider the full sales cycle
Let us know in the comments if you still have questions about ROI. We’ll answer them in a short time.