Understanding Your Return On Investment (ROI)
A fundamental part of any business is profitability and within that is Return On Investment or ROI. So, it stands to reason then that fully understanding your ROI is central to that aim and as such, extremely important. So, with that aim in mind, we take a look now at the subject in closer detail.
And we start with the definition.
What Does Return On Investment Mean?
As the term would suggest, Return On Investment describes the amount that’s taken in profit when put against what’s been spent to achieve it. For every £1 spent, you would set an amount that you would aim to get back in return. So, for example, if you’re asked what the ROI of your marketing budget is, you would calculate how much has been spent in advertising your product or service and how much profit it generated.
The traditional ROI calculation formula goes something like this:
Attributable Growth in Sales minus Marketing Costs = ROI
Essentially, the success of any marketing campaign is judged by the awareness it raises, the traffic it drives and ultimately, its ROI. It’s perhaps the most important factor too as it is, after all, why you conduct marketing campaigns in the first place.
While the Return On Investment formula shown above looks like a fairly simple one to comprehend, in reality there can be many more variable costs involved and measuring impact can be a tricky task. Also, identifying exactly what part of your sales growth is attributable to your marketing efforts can be difficult. Typically speaking, the larger the business, the harder it is to calculate.
What Does a Good ROI Look Like?
Generally speaking, a good yield for a marketing campaign would be a ratio of 5 to 1, meaning that for every £1 spent, £5 of revenue is generated. Anything less than 5 to 1 would be considered on the weak side and an ROI over 5 to 1 would be seen as strong. Ratios of 10:1 aren’t unheard of, but you shouldn’t try and run before you can walk.
It’s important to say that your precise Return On Investment will depend on your business, the marketplace, your industry and a whole host of factors in addition to your marketing spend. There are more complex ways of looking at your Return On Investment, but if you use this basic principle as a starting point, you won’t go far wrong.
Why Is 5:1 the Ideal Ratio?
The reason why 5:1 is the perfect ratio to achieve is that anything less than that wouldn’t result in much profit for the business in question. Taking into account other factors like the costs it took to buy goods or to manufacture them (which is usually around 50% of sale price), a 5:1 ratio is necessary to achieve the required income.
Again, it’s important to stress that the particulars of your own business will go a long way to determining your ideal ROI, but 5:1 is a good place to start.
A Complex Task
As you can see, determining your perfect Return On Investment and learning how to calculate it precisely is something that takes all of the guesswork out of your market strategies. However, if you’ve not done it before or you don’t have the time, it can be difficult. Knowing if what you’re doing is actually profitable or it’s not is key to knowing whether you need to rethink your strategy or whether you’re on the right track – so it’s vital that you have a grip on it.
If you find yourself too busy or if this side of your business isn’t your forte, don’t worry, as our team is here to help you. They have extensive experience in all business planning and strategy matters and they can help you get a clear picture of how well your marketing and other business efforts are paying you back.
By analysing your business and using their expertise, you’ll soon know exactly how your business efforts are impacting your bottom line and you can stop strategizing in the dark.
Contact our team now and let them talk you through how they can help you to take control of your ROI.