Want to calculate the return on investment for your business? Just enter the figures for a given month below:
What does return on investment mean?
A return on investment shows a business the profit gained from a particular investment relative to its cost.
For example, a business could spend £1,000 on marketing a product, this would be their investment. As a result of this marketing, it generates £1,250 of sales. The profit from this investment is £250.
Return on investment can be used to measure not only sales, but other financial investments such as expanding your business, purchasing extra stock, moving your business from your home to an office etc.
Why is your ROI important?
Understanding your return on investment is vital for you to make the correct financial decisions for your business.
It is a key metric to evaluate potential investment avenues, and selecting which is the most profitable.
This could be something as simple as which social media platform to promote your product on the most. If Facebook has proven to give a higher ROI compared to Instagram, you’d focus on Facebook more.
The higher the ROI on a specific investment, the more profitable it is.
How you can improve your ROI
The best way to improve your ROI is to identify which investment avenues are the most profitable for your business, and utilize them.
This is best achieved by truly understanding your customers, their needs, problems and demographics. To generate profit, it is vital that you understand your customer persona for your investment to convert successfully.
For example, if your product is face cream designed for women over the age of 60, however your marketing ads are designed to attract younger women on a platform older women don’t use, then regardless of how much you invest in marketing, your conversions will be low, and your ROI will be low.
Therefore, understand where your target customer will be so when you make an investment there is a higher chance of it being successful.
Additionally, you should focus heavily on conversion optimization to ensure your sales funnel is converting at it’s best. For example, if you are running Facebook Ads, you can use landing page software that offers A/B split-testing to optimize your funnel pages. A small conversion rate increase could increase your ROI and customer lifetime value (LTV) significantly, while reducing your customer acquisition costs (CAC).
How to calculate your ROI
(Profit – cost of investment) / cost of investment = ROI
(£1,000 – £800) / £800 x 100 = 25% ROI