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Your ROI: Everything You Ever Wanted to Know

 by zack on 20 Aug 2013 |
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Very few metrics are more important than your ROI. Return of investment is used to determine which of your efforts are producing worthwhile results, as well as those that are turning out to be mainly worthless. Unfortunately, it’s not always easy to track ROI in certain ventures. Social media for example, is a notoriously difficult ROI to follow. But never you mind the nay saying. We’re trying to remain solution oriented even in the most indomitable of circumstances. So strap in and suit up, we’ll be focusing on the many methods of determining the exact value of your investments.

Why should I track ROI?

For most of you, this is probably a no-brainer. It’s far more difficult to think of a single valid reason why you shouldn’t track an investment’s return, than it is to give you a comprehensive list of all of the benefits that tracking your ROI can have for your business. And because it’s always better to work smarter rather than harder, we’ll be going point by point through the benefits, both subtle and obvious, of tracking Return of Investment.

Think first about your organization as a human body, that of a professional athlete, who must always be in peak condition for world level competition. Think about your ROI as a monthly diagnostic performed by medical personnel. You’re trying to see exactly where your body is performing, and what it’s missing. If your diet suffers, then you won’t be able to run a sub 5-minute mile any longer. If you aren’t getting enough rest, you won’t be able to clean and snatch 400 lbs. It’s a slippery slope, if you don’t keep track of exactly how each vital component in your health and nutrition is interacting with the whole of your body, then some aspect of it is going to break down when you push it too far.

The health of your organization is the same way. Your overall reach, customer engagement, marketing, advertising, sales, and customer service components work together to keep your company’s heart rate healthy while you’re pushing the organization to its limits. To be certain of y our organization’s overall health, you’ll need to keep a close eye on each of these, and experiment with different variables to see what increases the end return of each.

Versatility

There's a variety of different marketing channels, and ROI can be tracked for most all of them. Just check out this graph of some of the most profitable digital marketing channels on average

Return of investment is an effective metric for many reasons, but its proclivity is what sets it apart the most. You can calculate ROI on nearly every action your business takes. Whether it’s a keyword you pay to rank for, as we discussed in out last post about the new Ashop UI, or perhaps the elusive effects of measuring social media returns. ROI can be applied in numerous capacities to offer you multitudes of powerful data bits that can help you make informed business decisions.

Profits

Let’s get down to brass tax. Everyone gets into the ecommerce business for one reason: they want to make money. Profit drives innovation, commerce, and every other factor that puts business of any kind in motion. The single greatest strength of ROI as a metric is its ability to measure the true profit value of an investment.

Knowing the amount of revenue your company produces is one thing, but knowing exactly how much of a percentage change each action you take produces in revenue is quite another. ROI exists to give you the lowdown on your profits that you can’t get just by looking at bottom lines.

Complete Metric

Let’s go back to the human body metaphor for a moment. When going in for that monthly diagnostic, you don’t just measure your blood pressure, heart rate, height, weight, and call it a day.  You check blood levels, hormone levels, and an overall full body check. What is your insulin doing? Is your bone density holding up okay?

You want to make sure your business health is measured in the same way, and that’s what ROI is for. ROI is what we like to refer to as a Complete Metric, and just as the title suggests it gives you a fuller picture than many other metrics do in isolation.

How to measure your ROI

Now that we’ve established the “why” behind ROI measurement, we can start digging into the nitty-gritty to discover the many methods behind the “how.”

The Simple Stuff—and Some Complications

In general, there is a simple formula to measure ROI.  You take the difference of the cost of your investment and your sales after implementing a new promotion, and then divide the difference by that same cost. Once you’ve got that number, you multiply it by 100 to express ROI as a percentage. Fairly easy to follow, yes? It looks something like this:

[(R-I)/I] x 100= ROI

I= Investment cost, R= revenue earned from sales

Using this simple ROI formula, you can draw, for the most part, very accurate conclusions about the efficacy of your marketing efforts.

Let’s imagine an example to give you a better idea of what we’re talking about. Let’s pretend that your online store sells widgets. You’re rolling out your brand new widget model for the year, and you're going to start an email marketing campaign that reaches a sizable amount of customers from your contact list. You’ve targeted each recipient according to feedback you’ve received as well as their tracked behavior on your site. So let’s say that this email campaign targets 1,000 different people, all loyal customers to your site. The email is personalized to each customer using a mail service that fills in their names, and the tracked behavior they’ve exhibited in the past. For example the introduction might go something like this:

“Hello Samantha,
Because you bought last year’s model of our patented mega-widget, we thought you might be interested in our brand new hyper-widget…”

Now that you’ve got the template designed and the targets locked, the bill for this venture comes out to a nice round figure of $4,000.00. You send out the blast and of the 1,000 people 800 clickthrough to your site. You must have done an exemplary job of targeting.  Of the 800 people 500 made orders for the new hyper-widget. The hyper-widgets sells for $30.00 a pop. So you got $5,000.00 out of the promotion. So let's plug in the numbers to find your ROI:

[(5,000-4,000)/4,000]x 100=25  So your ROI =+25%

Easy stuff. Unfortunately, there are a few other contributing factors that take this simple ROI formula, and turn it into a complex process that can leave your brain numb.

The biggest problem for marketers concerning ROI is time. Short-term campaigns are easy to measure. You know how much you spent, you can see the impact of said campaign in your quarterly report, and you’ve got easy to digest numbers explaining the increased revenues.

Long term investments and effects are a whole different ball game. A long-term promotion takes a while to build momentum; your profits may shoot up initially, level out, then drop, and then rise again due to a number of factors. The longer the campaign goes on, the more difficult it becomes to quantify.

Another thing that makes ROI difficult to deal with is the number of variables that interplay to drive up your sales. Fluctuations in market, bugs in your site, supply/demand, incidental costs associated with the product, overhead costs, and a numerous amount of other issues can all affect your profits. It can be difficult to isolate a single factor and assign praise or guilt for a change in ROI.

Even though there you've got these complicating factors, they can be overcome through precise planning, and good bookkeeping. To keep ahead of the time curve, you simply have to measure your metrics on a schedule. Perform ROI measurements on a set schedule, and keep track of the overall trends rather than the day to day changes. Precise metric tracking, such as is available with Ashop’s system of integrated metrics, can help you determine the outside factors that have affected your sales in the short term, while still allowing you to keep your eye on the big picture ROI over longer periods of time.

Your Personal Efforts

Aside from leaning over your computer screen and bean-counting, there are some other ways to more subjectively ascertain what your ROI might look like. A lot of this is simple stuff that can have some complex implications for your marketing efforts. You can begin by asking your customers questions. Things like:
  • How did you hear about us?
  • What was your first exposure to our business?
  • What made you decide to buy this product?
All of the answers to these questions can provide you with interesting insights as to how your customers are interacting with your online presence, and where you can focus more of your efforts, as well as where the money you’ve spent is providing you with the greatest ROI.

There are other interesting ways to track customer interaction, and its effects on your ROI, such as different landing pages for different campaign efforts, using unique coupon codes for each campaign, and grouping tracked customers by the different sources of their exposure. Taking these simple steps will help you gather numerical data about how many of your customers are coming from your different points of contact.

Software Tools

Measuring ROI is a difficult process for human beings without any sort of mechanical assistance. Using different computational implements can streamline your work and help you spend minimal effort, while receiving accurate information about the metrics that matter most to your business.

We’ve already mentioned email marketing, and how helpful a service like MailChimp or Silverpop can be. And if you’re a regular reader or customer, you know how proud we are of our own software that allows us to calculate our own return of investment in various circumstances. There are literally dozens of software options out there for you to choose from that can help you measure your ROI in a variety of ways. Though we’re sure you’ll understand that ours is the best and most helpful.

Your ROI is for sure your first and best resort for finding out a particular promotion’s effectiveness, and should be utilized as often as possible when developing sales and marketing strategies. It’s the number one metric for savvy online marketers and is undoubtedly a permanent mainstay in the ecommerce vernacular. Learn it, use it, and love it.  That’s all for now. Keep coming back to the Ashop blog for more helpful information to build your ecommerce empire

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