SEO : What is ROI?
In the framework of our SEO Tips series, from the NARAN-HO Design team, specialists in web design in Marbella, we will talk to you about ROI. We have written this article in conjunction with Steering Bird, consultants in business management and administration.
What is ROI?
The Return on Investment or ROI is a concept that comes from finance. It is a performance indicator that is used to evaluate the efficiency of an investment. Also, it is used to compare the efficiency of several different investments.
As Investopedia (owned by Forbes) indicates: “ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio.”
ROI is important, as it allows you to evaluate how some initiatives contribute to the results of your company. The most common is that it is measured in percentage terms.
How it is calculated?
It can be calculated in different ways, but we show you the one we use at Naran-ho Design.
ROI = [ (Profit – Investment) / Investment ] x 100
For example: the total return on an investment was EUR 50,000, and the initial investment was EUR 10,000. With the formula that we’ve indicate, we have:
ROI = [ (50,000 – 10,000) / 10,000 ] x 100
ROI = 400%
Thus, the indicator shows that the return on investment was 400% of the initial investment.
How to analyze it?
ROI can be used as a very basic indicator of the profitability of any investment, such as buying and selling of stocks, company expansions, new businesses, marketing campaigns, etc.
In very simple terms, if the ROI of an investment is positive, there is a profit, but if it is negative, there is a loss.
From a financial point of view, Return on investment has certain limitations.
- In the first place, it is not useful for evaluating or comparing investment plans or projects, since it does not consider the time variable, among others. It is only useful to know if the investment made has resulted in positive or negative returns.
- ROI itself doesn’t mean much either. In the calculation example we had an indicator of 400%. At first glance it is good, but if your KPI (key performance indicator) was 800%, it is not a satisfactory result. Or, if the ROI of the same marketing campaign conducted the previous month was 200%, the result is good.
For this reason, ROI works very well in simple comparisons on previously defined KPIs.
ROI in Digital Marketing
ROI is one of the basic financial indicators that has had a good transfer to Marketing, especially Digital Marketing. It is used to evaluate the investment in different marketing campaigns and measure their results.
We have previously indicated that there are several metrics in content marketing. The ones that are most analyzed in digital marketing campaigns are the opening rates and number of clicks. However, the most important is the income, or profit, generated by the campaign.
ROI in marketing campaigns can help you know which products are sold more than others, which channels generate more returns than others, which geographical area has more profitability for you, etc. You could even compare campaigns and evaluate their returns.
As we indicated previously, ROI does not consider the time variable and that you should define a KPI previously or compare with previous values.
ROI also allows you to plan goals, based on concrete results. This will help you determine whether or not it is worth investing in certain channels (Facebook, Instagram, Twitter, LinkedIn, digital campaigns, etc.)