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11 definitions of ROI reveal a simple solution

Posted on November 24, 2012 by Rob Petersen

 

 

 

Show Me the ROI

Return on Investment (ROI) is the final word on the success of any marketing campaign. Among marketers today, the need to “Show Me the ROI has never been greater but most can’t agree what it is. Consider these facts:

  • 87% of marketing leaders agree capturing the right data is important to measuring ROI in their companies
  • 70% say their marketing efforts are under greater scrutiny
  • 70% report that a “cross-platform model” for ROI on their business is a major goal
  • 68% base marketing budgets entirely or in part on “historical spending”
  • 57% do not base their marketing budgets on any ROI analysis
  • 39% say it is important to spend only on marketing activities where  financial effects can be measured
  • 37% did not mention financial outcomes when asked to define ROI
  • 37% claim brand awareness is the universal metric they use to make marketing decision
  • 22% base marketing decisions on “gut instinct”

Source: 2012 BRITE Study (Columbia Business School and NY AMA)

Does this sound like your organization? We looked at 11 definitions of ROI. They revealed a simple solution.

SOLUTION:

ROI is the final word because it proves how well a business is being managed. The formula for ROI is:

Return (e.g. sales, income, profit) – Investment/Investment (X 100) = %

Let’s take an example. A business invests $100,000 at the beginning of the year on either an ad or marketing campaign or the money is used to make internal marketing improvements. At the end of the year, the gain is $150,000. The ROI is: $150,000-$100,000 = $50,000/$100,000 X 100 = 50% return on the investment or a 1.5-to-1 ROI.

A few steps to be taken when beginning.

  • Establish a “baseline” for the return before the measurement period (in the example it was 0)
  • Define the basis of the “return” or gain (e.g. sales, income, profit)
  • Determine the time frame

But this isn’t hard to do. Here are some examples of how it might be expressed:

  • Double sales in a year and a half
  • Increase profitablity by 25% within a year
  • Gain 200 new customer within 3 months
  • Generate a 25% increase in conversion within 6 months
  • Decrease customer complaints by half within a year

Now you’ve got a plan; one with a clear business objective, defined goals and ROI evaluation model.

But if you read this and say, “the ROI for my business requires more ‘rigor’ and ‘granularity;” then, determine Key Performance Indicators (KPI’s) so you have an actionable scorecard to keep your business on track. Here is some help on how to do it with a video that explain how to identify KPI’s.

11 DEFINITIONS FOR ROI THAT LED THERE

1.  The rate of revenues received for every dollar invested in an item or activity. Calculating ROI is not difficult. It is the amount of revenues generated divided by the expense. For example, if you spend $1,000 per month for Pay Per Click (PPC) advertising and generate $2,000 in revenues directly from your PPC campaign, your return on investment is actually $2,000 but is more often referred to as a ratio such as $2 or 2 to 1. – About.com

2. The measurement for profitability of an investment. It is calculated by dividing the revenue each product generated by its expenses. Overall, the ROI tells the story of a business’s financial successes or hardships. – eHow

3. It’s the most common profitability ratio. The most frequently used method to determine ROI is to divide net profit by total assets. So if your net profit is $100,000 and your total assets are $300,000, your ROI would be .33 or 33 percent. – Entrepreneur.com

4. The money that a person or company earns as a percentage of the total value of his/her/its assets that are invested. It is calculated thusly: Return on investment = (Income – Cost) / Cost – Free Dictionary

5. A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments The formula (Investopedia) is:.

ROI Formula - Investopia

6. The income that an investment provides in a year – Investor Words

7.  The cost of a marketing campaign relative to the profit generated. If you invested $1000 on January 1, and on December 31 you had $1,200, you generated a 20% ROI – your Return on the Investment of the original $1000 is $1200 – $1000 = $200 / $1000 invested = 20% ROI on an annual basis (excluding transaction costs). – Jim Novo

8. ROI is more than ‘money in, money out’. It’s about efficient business success (expressed through not only money but people’s time)  – Eric Swayne and Radian 6

Eric Swayne and Radian 6

9. A measure of the net income a firm is able to earn with the its total assets. Return on investment is calculated by dividing net profits after taxes by total assets. When someone asks about ROI, they are really asking: What do I get back (‘return’) for the money I’m being asked to spend (‘investment’)? What is it really worth (the “ROI”)? – Resource Management Systems

ROI costs vs. benefits

10. How much profit or cost saving is realized. An ROI calculation is sometimes used along with other approaches to develop a business case for a given proposal and grade how well a company is managed – SearchCIO

11. A snapshot of profitability adjusted for the size of the investment assets tied up. The formula is: return on investment = (gain from investment – cost of investment) / cost of investment – Wikipedia

Our company, BarnRaisers, was founded on the idea marketing campaigns should start, be sustained and scaled based on ROI and proven relationship principles. Does this solution for ROI help your business? Would you like to learn more about how we done it for others?

 

 

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