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What Is ROI In Digital Marketing And How To Calculate It

You probably already know about all the benefits digital marketing offers.

But if you've come here by pure chance and you'd like to find out if digital marketing is for you, don’t worry, here are some compelling reasons to help you with the decision

Let’s face it, digital marketing is not an optional part of commerce today.

Traditional marketing had its golden age, but its invasive methods and limitations are no longer suited to consumer needs. 

You can check out this comparative table if you’d like to know the exact the difference between the classical marketing school and the modern one, and the pros and cons of both.

Now getting to what you really care about! 

If you own a business or work in marketing for a company, you know that measuring the results of your campaigns is a must.

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Why? Because what is not measured, can’t be improved, right?

It’s the only way to find out how they’re performing, how you can improve them, what you need to add or remove, and who you should target with them. It’s the only way to really optimize them.

But today, one metric is more important than the rest. It’s a metric of considerable importance when it comes to marketing strategies: return on investment (ROI).

What is ROI? It’s the most widely-used profitability indicator. It measures the profit or loss generated by an investment based on the amount of money invested

Usually, it’s expressed as a percentage and used to make financial decisions: to compare a company's profitability or efficiency between different investments.

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There are a variety of ways to calculate ROI, but the most frequently used method is to divide the net gain by the total cost of the investment

So if you bought $1,000,000 in stock and sold it two years later for $1,200,000, your net profit would be $200,000. To calculate your ROI, you would have to do the following: 

 

(200,000 / 1,000,000) x 100 = 20% 

 

If we wanted to be more precise in the calculation, we would have to deduct the amounts due for tax and any other additional cost. 

As you’ll see, ROI is not synonymous with net profit. It has to do with the percentage of the initial amount invested that you made into profit. 

Why is ROI important for you in particular?

Because you can use it as a very rudimentary measure of the profitability of an investment. It’s very easy to calculate and interpret, and can be applied to many types of investments.

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Of course something so good could not be perfect and the reality is that the fabulous ROI has certain disadvantages.

Because ROI can be manipulated: results may vary among users due to the data entered. What usually creates the confusion is the uncertainty about what constitutes the "return" and exactly what the investment was. 

Marketers also disagree a little on what return means. Here are some examples of how they might define what the original investment actually represented.

  • Total revenue = basically the total value generated by the sales of a campaign
  • Gross profit = total revenue, minus the cost of what producing or delivering a product or service represented
  • Net profit = gross profit minus any additional costs (creative, technical costs, sales costs, printing costs, etc.)

Another important disadvantage to consider is that ROI doesn’t take into account the time factor. The shorter the campaign term, the more valuable and desirable a positive ROI actually is

Be that as it may, if your ROI calculations are accurate and thorough, using ROI is a great way to focus on the effectiveness of your campaigns.

So, if one of your campaigns generates a return on investment of 10% and another of 60%, it goes without saying that in the future you should invest your budget in the most profitable one. 

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ROI is also an excellent ally of marketing and helps you logically justify investments in this area. 

If you start thinking that maybe it's a good idea to cut back on marketing expenses, think again; marketing is an excellent source of income.

But how are you going to prove that? I think you already know the answer to this question, but if there was any doubt, go with the ROI!

So take advantage of this fantastic metric to refine and fix your campaigns; perform as many tests as you need and begin to rely on solid results instead of guesswork.

The better you understand the concept, the better control you’ll have over your investments. The secret of a successful business lies in the ability to learn and optimize continuously.

Finally, it is important to mention that there are many more metrics or indicators that you should know, and best of all, we already have a post that delves into them ready for you. Check them out here and get ready to be an expert in digital marketing.

And if you think there are any other metrics worth mentioning, share it with us in the comments. 

Now, the next time you find those 3 letters, you'll be sure to know what they're all about.

 

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Andric Pasillas R.
ABOUT THE AUTHOR | Andric Pasillas R.
Writer, editor, translator and proofreader for more than 4 years. My passion is to write and inform. I consider myself a relentless researcher of the digital world.
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