How to Calculate ROI: It’s Not as Hard as You Think
Calculate return on investment
We’ve all heard and probably used, the term ROI. We know that it stands for Return on Investment.
But what exactly is Return on Investment?
In this article, we’re going to look at what ROI is, how to calculate ROI for your business, your marketing, and provide you with a simple ROI calculator you can use for your business.
So, what is ROI?
ROI is a calculation that’s commonly used to measure the financial return you’ll receive from the money you’re investing into something. It’s the count or multiplier of how many dollars you get back for every dollar you put in. Essentially, you’re creating a clear snapshot to determine whether or not the investment is worth it.
How to calculate your ROI is actually reasonably simple, and as such, has made this metric a universally understood measurement of the profitability of your potential investments.
ROI is different to simple profit
Profit is the financial figure you arrive at after subtracting your expenses from your income. Instead, calculating ROI allows you to measure the effectiveness of your potential investment.
What is considered a good ROI?
What determines a good ROI really depends on what your business is looking to achieve, and the investments you’re considering.
Simply put, though, if you calculate your ROI and it comes back with a positive figure, then it’s likely a good investment to look into. You can use this figure to compare different investments and see which is likely to deliver the better return. If your ROI calculation returns a negative result, then this implies the investment is going to make a loss for your business, and you know to stay away from it.
ROI does have its limits
While calculating ROI is an easy way to get a quick idea of the value of an investment, it’s not appropriate in all circumstances.
For example, if you perform free marketing activities that earn you income, such as through an organic social media post or running a free online webinar (well, arguably free—we’re not including time in this) then your ROI is effectively 0%. 0% ROI would usually be a bad outcome, but in this case, it doesn’t portray the full picture.
So ROI is typically reserved for investments with clear monetary sums.
How to calculate ROI
Calculate ROI yourself using this simple formula
There are a few different formulas you can use yourself to easily calculate the ROI of purchases for your business. However, we’ve included the one that’s easiest to use and to understand.
(Net income earned from the investment / Cost of investment) x 100%
How to calculate ROI on your marketing spend
Marketing spend is one of the most common ROI calculations used for businesses. So let’s look at an example.
Say your business spends or is looking to spend, $1,000 a month on your marketing, across your social and online channels. This includes social media ads, pay-per-click ads, and the like.
From this $1,000 spend, your monthly campaign ends up generating $10,000 in revenue.
Using the ROI formula: ($10,000 / $1,000) x 100% = ROI of 1,000%
So for every dollar you spend on your marketing you’re seeing $10 in profit.
But what if you’re looking at the ROI on marketing leads?
You spend $1,000 on a lead generation campaign. During this campaign you generate 100 new leads. This means that you’re spending $10 for every lead.
Your business makes on average $2,000 from each customer.
If you convert 3% of these new leads into customers (which is admittedly just 3 new customers), at $2,000 income each, that’s a return of $6,000
($6,000 / $1,000) x 100% = ROI of 600%
Some useful tips for improving ROI
Outside of choosing the right assets and avenues for investment, improving your ROI comes down to refining how and what you sell.
Audit your sales process
Assessing your sales pipeline from start to finish lets you determine where your marketing processes may be holding you back.
It could be as simple as adding a new call to action button onto a sales landing page. After all, it’s been proven that a well-written, targeted call-to-action can convert 202% better than a generic ‘Buy now’-style button.
Or, it could be as wide-reaching as overhauling your entire sales funnel, and looking at where you’re putting your marketing spend. For example, paid channels like Facebook and Google are usually proven to be the platforms with the best ROI. Is your business making the most of these channels?
Review your sales content
Following on from your sales process, ensuring you have the right sales content in place can make all the difference to your sales process.
And these days it’s not just words—what about video? In a 2020 study, 83% of marketers surveyed found that video content has helped them generate leads. In the same survey, 84% of consumers surveyed said that a well-produced brand video had convinced them to buy a product.So changing the type of sales content you use in your sales funnel can make a huge difference to your ROI.
Cut out unnecessary costs in your budget
One of the biggest ways to improve your ROI is to cut back on all unnecessary costs.
This may take some time, but it can make a huge difference. For example, you might look into finding a cheaper provider for the product you’re looking to sell. Or, if you’re looking at your marketing holistically, it could be finding a more cost-effective internet provider, or sales platform.
It can also mean looking at how you make your purchases and payments. You’re most likely getting slugged with unnecessary costs simply for doing your banking. Fees such as excessive FX and international transaction costs, high bank accounts fees, and other similar expenses.
Luckily, there’s a way to cut these costs for good.
Discover how Airwallex uses better banking to help you improve your ROI
At Airwallex we make it easy for you to break free of the limitations imposed by the big banks, with a range of better products that ensure you reduce the fees you pay for your banking. A simple fix like this ensures you get much better ROI when making your payments.
Our Global Accounts empower you to create individual wallets for 11+ currencies, allowing you to send, hold, and receive international currencies without the associated fees, and avoid double conversion.
You can make international payments to 130 countries, in over 34 different currencies, with no minimum transfer fees.
Airwallex Borderless Cards let you instantly create physical and virtual cards for your business as soon as your account is approved, letting you make payments as soon as you need to.
We don’t charge any monthly account fees, international fees, or withdrawal fees—ever.
We’ve also got some of the best FX rates around. We only ever charge 0.5% or 1% above the interbank FX rate, so you receive the best rate possible and can make a better return on your payments.
Now that’s a winning ROI formula.
Get in touch with us today to book a demo for all our products, and see how you can use them to streamline your banking and boost the ROI on your marketing spend.
Related article: Break-even analysis
Joe Romeo is responsible for scaling our Airwallex's product adoption in Australia and the world. An all-round growth enthusiast, Joe's speciality lies in SEO, organic acquisition and making lasagna.
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