In this article you will learn about ROI and ROAS – performance indicators (KPI) used to measure the results obtained by a business through online marketing.
Agentia re7consulting is the only German agency on the Romanian market that offers a complete suite of online marketing services, including: Social Media Marketing, PPC Campaigns, Content Marketing or SEO Optimization.
And so that a business that uses our services knows for sure what results we’re actually looking for to define the success of their campaigns, our team uses a series of performance indicators (KPIs): ROI and ROAS.
Because a business that promotes its products or services through online marketing strategies needs to know clearly what results it needs to track in order to benefit from predictability, in other words it needs KPIs (performance indicators) that help it understand what works and what doesn’t work in the short, medium and long term.
What is KPI (performance indicators)?
KPIs (Key Performance Indicators) – performance indicators used to demonstrate how effectively a business achieves its key objectives.
Companies use Key Performance Indicators (KPIs) to measure success in achieving goals in different areas:
- overall business performance
- sales, marketing
- human resources and others
How to define a KPI?
Defining these key performance indicators can be tricky. The operative word in KPI is “key” because each KPI must relate to a specific business outcome, a performance measure.
Key Performance Indicators (KPIs) are an important part of the information needed to determine and explain how a company will progress to meet its business and marketing objectives. KPIs help organisations understand whether the company is moving in the right direction and, if not, where it needs to make beneficial changes.
Whatever it measures, the goal of a KPI is to improve organizational health. Anyone working in marketing needs to understand exactly what KPI is.
KPI is a quantifiable measure that a company uses to determine how well it is achieving its operational and strategic goals. Different companies have different KPIs depending on their individual performance criteria or priorities. It is known that these performance measurement indicators usually follow industry-wide standards.
To define a KPI yourself, you can start by answering the following questions:
- What is the desired result?
- Why does this result matter?
- How will you measure progress?
- How can you influence the final result?
- Who is responsible for that result?
- How will you know that you have achieved the desired result?
- How often will you review your progress towards the end result?
The three characteristics of KPIs are :
- Quantitative -KPIs can be presented as numbers
- Practically – KPIs integrate well into existing company processes
- Applicable – KPIs can be applied in practice to effect the desired change
To be effective, these performance indicators must be based on legitimate data and must provide context that reflects business objectives. KPIs must also be defined in such a way that external factors beyond a company’s control cannot interfere with them. Another key issue is that KPIs should have a specific timeframe, which is divided into key checkpoints for accuracy.
Performance indicators – examples:
An organisation’s KPI is not the same as its purpose. For example, a school may set a target of passing all students in a particular course. However, instead of using student records of passing grades to set the goal, the school uses the student failure rate as a KPI to assess the situation. Another example is a business that chooses to use the number of seasonal products sold in the winter months, for example, as sales performance indicators.
Other examples of KPIs used by companies can be :
- Status of existing customers
- Number of new customers acquired
- Number of loyal customers
- Customers segmented by profitability or demographics
- Waiting time for delivery of customer orders
- Time to stock-out
Companies should take a number of steps before choosing the best key performance indicators. These steps include:
- Establishing clearly defined business processes
- Establishing requirements for business processes
- Qualitative and quantitative measures of results
- Determining variation and adjusting processes to meet short-term objectives
For example, suppose your ultimate goal is to increase your sales revenue this year, so for this goal, you would set the following KPI: “sales growth” which you can define as follows:
- Sales revenue growth of 20% this year.
- Achieving this goal will enable the company to become profitable.
- Progress will be measured as an increase in sales revenue relative to the total budget spent to generate those sales.
- The bottom line can be influenced, for example, by: hiring additional staff on the sales side or by convincing existing customers to purchase other services or products that your business sells.
- Responsible will be: Sales Manager.
- Sales will increase by 20% this year.
- Progress towards the bottom line will be reviewed monthly.
However, in order to achieve this 20% sales growth KPI, you will also need to make some investments for which you will want to have a good ROI.
What is ROI?
ROI is an acronym for “Return on Investment”. From a financial point of view, ROI is the percentage of an investment that is returned to the person or company making that investment.
In the case of a business, this ROI can occur when the company makes a profit, if the company is sold or if it is listed on the stock exchange.
ROI is also known as: Payback rate.
Whatever product or service your business sells, it is important to know how long it will take to become profitable.
When we ask what ROI means, we can define ROI as the percentage of the investment returned to the investor. The acronym Return of Investment – or ROI, has already become more and more used in any industry and especially in the field of marketing.
The main objective of any marketing strategy is to increase the profitability of a business. For this reason, it is important to determine which marketing actions are most profitable, considering the initial investment and the final result.
Return on investment allows you to find out what type of advertising your audience is most likely to interact with and therefore convert. If you know what ROI in marketing is, then you will be able to act to optimise it or change it, through the actions executed in a marketing campaign.
Another reason why ROI is important in marketing is a clearer understanding of your audience’s behaviour. If you know how to calculate ROI, you will be able to identify based on the numbers that come from your investment and what type of strategy works best and impacts your audience online.
Also, in online marketing, the ROI of an investment is also used to compare the effectiveness of a business’s investment in each marketing channel used to promote products or services to potential customers.
ROI in online marketing is the practice of attributing profit and revenue growth to a business’s impact of online marketing initiatives.
To calculate the return on investment of online marketing, businesses can measure the degree to which each marketing strategy and channel contributes to revenue growth.
This return on investment in online marketing is used to justify online promotion spending and to allocate the budget for the business’s online marketing campaigns.
On an organisational level, calculating return on investment in online marketing can help optimise marketing efforts.
How to calculate return on investment (ROI) in online marketing?
There are many different ways to calculate return on investment (ROI) in online marketing, but the basic formula used to understand the impact of online marketing is relatively simple:
(Sales Growth – Marketing Costs) / Marketing Costs = Marketing ROI
However, it is important to consider that this formula assumes that all sales growth is directly related to all online marketing efforts.
To get a more realistic view of the impact that online marketing has on a business, one should also take into account sales generated organically.
In this case, the following formula should be used to calculate the ROI obtained from online marketing:
(Sales Growth – Organic Sales Growth – Marketing Costs) / Marketing Costs = Marketing ROI
However, when using formulas to calculate the ROI achieved using online marketing, it is also important to take into account all the efforts, strategies, channels, agencies, freelancers or employees of the company who have allocated time or money to promote the business online.
It’s also worth noting that the definitions for a profitable “return on investment” can vary depending on the marketing team’s strategy and the overhead of implementing all online marketing campaigns.
Let’s explore a few key elements to consider in order to find out what the return on investment is for online marketing:
Total revenue: by analyzing the total revenue generated by a given campaign, marketers can get a better picture of their efforts.
Total revenue metrics in measuring ROI in online marketing are ideal when you want to:
- achieving strategic planning
- establishing budget allocation
- monitoring the overall impact of online marketing
Gross profit: calculating gross profit helps online marketers understand how online marketing campaigns are performing in relation to the total net revenue generated, the cost of producing or delivering goods and services.
In this case, ROI is calculated as follows: (Total revenue – Cost of goods).
Net Profit: by further analyzing the performance of online marketing campaigns, specialists can calculate the impact of marketing on net profit by adding to the calculation formula: (Gross Profit – Additional Expenses).
Online marketers can also calculate return on investment (ROI) through customer lifetime value (CLV).
This formula helps to assess the long-term return over the consumer’s purchase cycle.
To assess ROI using CLV, specialists can use the following formula:
Customer lifetime value (CLV) = (Retention rate) / (1 + Discount rate / Retention rate)
How do we measure online marketing ROI without any formula?
Given that such general formulas can have various pitfalls that affect the bottom line, it is important for a business that chooses to outsource its online promotion to an online marketing agency to follow these steps:
- Set clear goals:
In the book – What Sticks: Why Most Advertising Fails and How to Guarantee Yours Succeeds, Rex Briggs coined the term “ROMO” – Return On Marketing Objective.
This term takes into account the fact that a marketing campaign can have other objectives as well, such as:
- brand building
- increasing visibility
- changing the perception of potential customers
With this in mind, it is crucial that businesses and online marketers set clear goals that indicate what external factors make up the final ROMO, as well as ways in which these unique factors can be measured (and subsequently applied to evaluating the ROI of online marketing investments).
- Clear costing:
In online marketing campaigns and strategies there can be many costs that will significantly reduce the final ROI.
Therefore, determining the costs of online marketing can help in clearly formulating strategies for measuring ROI and determining which metrics are included when calculating your online marketing ROI.
While we understand where things stand in terms of KPIs and ROI, it’s important to also discuss tracking the financial results you get from paid campaigns (PPC – Google & Facebook Ads).
The ROI of PPC campaigns can be evaluated using ROAS (Return On Advertising Spend).
What is ROAS (Return On Advertising Spend)?
ROAS, or return on advertising spend, is a marketing metric by which the effectiveness of PPC campaigns can be measured.
ROAS helps businesses (online stores) evaluate what works and find ways to improve future PPC campaigns.
An online shop spends €2,000 on PPC campaigns in Google Ads and those campaigns generate €10,000 in revenue. Therefore, the return on this investment has a ratio of 5 to 1 (or 5%), calculated as 10,000 euros (revenue) divided by 2,000 euros (expenditure) = 5 euros.
In this situation, ROAS = 5 euro or 5:1.
Why does ROAS matter for PPC campaigns?
How is ROAS calculated?
ROAS formula = Campaign revenue / Campaign cost
ROAS measures the amount of revenue generated by a marketing campaign for every dollar spent on advertising. An ROAS of 1 indicates that the campaign is breaking even, while an ROAS greater than 1 indicates that the campaign is profitable, and an ROAS less than 1 indicates that the campaign is not profitable.
What is return on advertising spend (ROAS) and how is it calculated?
In other words, return on advertising spend is equal to the total value of the conversion divided by the advertising costs. “Conversion value” measures the amount of revenue your company earns from a given conversion rate. If it costs you £20 in advertising costs to sell one unit of a £100 product, the return on advertising spend (ROAS) is 5 – for every £1 you spend on advertising, you earn £5 back.
What is the difference between Facebook ROAS and Facebook ROI?
Return on Ad Spending(ROAS) Facebook Ads measures the revenue generated against the money spent on an ad. ROAS is designed to measure the direct impact of money spent on online marketing and advertising campaigns and allows the performance of a campaign to be evaluated without taking into account the additional costs of campaigns, training, etc.
ROAS is simply the total revenue generated from running ads on Facebook (your ROAS) divided by your total ad spend. For example, let’s say you spend 50,000 RON in a month on Facebook Ads and they generate 150,000 RON in new sales for your business. That’s a 3X return (150,000 RON /50,000 RON).
Return on Investment (ROI) Facebook measures the return on your overall investment and takes into account not only the dollars spent, but also the time, energy, labor and resources spent to generate that return. It could also be argued that the “return” in this case exceeds the revenue created. It is a business measure, which means it measures not only the performance of an ad, but also the performance of your effort and your team.
How is the ROAS formula calculated on Facebook and the return on ad spend on Facebook?
Here’s how to calculate ROI on Facebook:
- ROI formula: ROI = (Revenue – Costs) / Costs
- ROI percentage = (Revenue – Costs) x (100 / Costs)
Here’s what a ROAS calculation looks like for Facebook:
- ROAS formula: ROAS = Revenue / Cost
- Percentage return on advertising expenditure = (revenue – cost) x (100/cost)
The above table clearly illustrates the difference between return on investment and return on ad spend and how return on investment can be negative while return on ad spend is positive.
Since ROAS is a simple ratio value, it is possible that your ads will have a higher return on ad spend but generate less profit.
How do you set the best KPIs to achieve a profitable ROI and ROAS?
Call on the online marketing services of a dedicated agency and discuss all aspects of the collaboration with them before signing a contract.
Set out very clearly the KPIs, ROI and ROAS you want, the budgets allocated to online marketing campaigns, and the online marketing strategies that will be used to achieve the desired results.
If you need advice or want profitable online marketing services, do not hesitate to contact us.
The re7consulting agency is at your disposal with complete online promotion services for your business and with a team of specialists with experience both on the Romanian and German markets.