How to Perform ROI Calculation
If you’re planning to start an eCommerce business in Hong Kong, there are several calculations that you should familiarise yourself with, including the income statement, cash flow analysis, break even analysis, and ROI formula.
In this blog post, we’re going to focus on ROI calculation and how you can use it to evaluate your business. We’ve also included a simple ROI formula that you can use for measuring the return on investment.
What is ROI?
ROI is a widely used calculation for measuring the financial gain of an investment. It compares how much you put into the investment to how much you can gain from it to evaluate its profitability. In other words, through calculating the ROI of a particular investment, you will get a clear idea of whether or not you should put money in it. It is relatively straightforward to calculate ROI (we’ve included the formula in this article), which makes this an incredibly useful and accessible tool to investors and business owners alike.
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?
This comes down to what your eCommerce business is trying to achieve and what other investment options you’re comparing it to.
Put in the simplest terms, if your ROI calculation returns a positive number, this means that you will gain a profit from your investment, indicating that it’s probably something that is worth considering and looking further into. You can compare this number with the ROI figures of other investments that you’re interested in to identify the one with the highest ROI figure that will bring you the biggest return.
If your ROI calculation returns a negative figure, this means that the investment will bring a loss to your business, so you should probably 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
Use this simple ROI 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
Businesses often use ROI calculations to determine whether or not a marketing campaign will generate profit. Here’s an example:
Sophia is planning to spend HK$5,000 a month on creating digital marketing campaigns for her online clothing store. They include social media ads, Google Search ads, and Display ads.
She expects that a HK$50,000 monthly revenue will be brought in by the HK$5,000 marketing spend.
She uses the ROI formula (HK$50,000 / $5,000) x 100% = ROI of 1,000% and discovers that she is earning HK$10 in profit for every dollar she spends on her marketing.
But what if Sophia wants to know the ROI on marketing leads instead?
Sophia spent HK$5,000 on a lead generation campaign. The campaign generated 100 new leads for her business. This means that each lead costs HK$50.
On average, each customer spends HK$15,000 at her clothing store.
If 3% of these new leads are converted into customers, Sophia will gain a total return of HK$15,000 x 3 = HK$45,000 from the campaign.
Using the ROI formula, Sophia knows that her ROI for this campaign is (HK$45,000 / HK$5,000) x 100% = 900%
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 allows you to 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, Hong Kong’s digital marketing landscape has been increasingly shifting towards mobile, with mobile ad revenue expected to make up 54.6% of total internet ad revenue by 2025. Is your business focused on mobile marketing strategies?
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 videos? A recent report indicates that video display ad is currently the fastest growing type of mobile ad in Hong Kong and is forecasted to rise at a 20.4% compound annual growth rate from 2021 to 2025.. 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. Just hear it from our customers who have reported saving up to 90% in transaction fees and FX rates after switching over to Airwallex.
Our Global Accounts empower you to create individual wallets for 11+ currencies, allowing you to send 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 virtual cards for your business as soon as your account is approved, letting you make payments as soon as you need to. Bind your Borderless Card to your digital wallet to enable Apple Pay or Google Pay.
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.
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