How to Calculate Your Return on Investment (ROI)
When it comes to online marketing, and specifically PPC advertising and Media placements, the single most important calculation you can perform is your daily, weekly and monthly return on investment or ROI calculation.
Of course your daily weekly and monthly profit and loss (P&L) report is just as important, but what your ROI calculation allows you to do is assess in terms of a percentage what your actual return is.
Generally speaking I won’t promote anything that does not have a consistent ROI in excess of 100% because I know that we have many campaigns that do way more than a 100% return and therefore it does not make sense for me to put my companies’ money into investments that will return less.
So my advice to you if you are engaging in paid advertising, if you are not doing ROI calculations, you’d better start, because profits can be deceiving until you quantify this as an actual return on investment expressed as a percentage.
Over the years I have seen many incorrect formulas for calculating Online advertising return on investment, so I thought that it would be a good idea for me to share with you the correct formula you should be using.
ROI = Total Income Generated less Advertising Spend divided by Advertising Spend Multiplied by 100 = ROI
So for example: If you spend $100 on PPC advertising and generate $300 in affiliate commission then your ROI will be as follows:
$300 – $100 = $200 / $100 * 100 = 200.00%
There are more complex ROI calculation considerations; the top example is pretty easy because as an affiliate the income you receive is net income, whereas when you have your own product, income generated (i.e. sales) is a gross figure and you still need to come back to your net figure before adverting spend to work our your true ROI on margin.
However for most of you the calculation above in the general affiliate model will work just perfectly.
Dawie said,
Wrote on February 10, 2010 @ 5:43 am
Thanks for the post. I have certainly seen a lot of other ways when it comes to calculating this. But from now on i'll use this one
Anton said,
Wrote on February 10, 2010 @ 6:03 am
Thanks Justin for explaining this.
Thabiso said,
Wrote on February 10, 2010 @ 8:13 am
Dawie has taken my words these is the best method i’ve never seen so far
Dale Maxwell said,
Wrote on February 10, 2010 @ 7:12 am
Great post and very important info, although I watch mine in a slightly different way its the key to success in this business
ChrisDuToit said,
Wrote on February 10, 2010 @ 8:32 am
Very true – your ROI is the bottom line when it comes to making decisions regarding your marketing – both online and offline. Offline is just so much harder to track. Online you can even calculate the ROI for a specific keyword on a specific search engine/media buy, not just the campaign as a whole.
That is also what I love about this industry – no bank will provide you with a 100% or higher return on investment…
Zee said,
Wrote on February 10, 2010 @ 8:34 am
You made it looks so simple!
That's really wonderful.
Thanks
MJGilchrist said,
Wrote on February 10, 2010 @ 9:07 am
Great info – Thanks once again Justin. I've seen several other ProIM guys calculations that have been simpler, more complex and just generally strange too. This calc makes the most sense.
JustinHarrison said,
Wrote on February 10, 2010 @ 12:21 pm
Chris you are so right, that's why I stress with poeple starting out the importance of investing back into the business, the more you put back in, the more you get out month after month after month.
And if you are comparing the ROI against traditional investments, its crazy, for example we turn our cash every 3 months (average) and our average ROI for paid placements is around 308% – so theoretically 1200%+ return on investment…
So yes no bank or other investment comes close!
JustinHarrison said,
Wrote on February 10, 2010 @ 12:22 pm
Yes, I am just a dof ex rugby player, so I like to keep things simple LOL
JustinHarrison said,
Wrote on February 10, 2010 @ 12:23 pm
No problem Anton, and BTW I like the new blog of yours, looking good.
Joan said,
Wrote on February 10, 2010 @ 1:15 pm
Hi Justin,
Thanks for the post – the KISS model always works best. Coming from an accounting background this is simple enough for anyone to follow.
My only thought to ponder… Earnings for the individual should be taken into consideration, especially if you have hit the Tax bracket and need to declare earnings. Remember Tax Man will not reimburse you for not calculating correctly.
Darryn Rex said,
Wrote on February 10, 2010 @ 10:36 pm
Thanks for the advice. As always, straight to the point. If there's not enough ROI then what IS the point?! I think that's something I've held onto from the start talking to you about the online model – how does one quantify it? And Chris you're so right, there is nothing like the online model to track absolutely everything that's going on in your business. Offline just doesn't cut it any more.
Thanks Justin.
Phillip van Coller said,
Wrote on February 10, 2010 @ 9:02 pm
Thanks for the info, currently busy with advertising calculations
DarrynRex said,
Wrote on February 11, 2010 @ 5:32 am
You're absolutely right. I know a guy that tracks offline in a way that you've described in your comment above but unfortunately ends there and doesn't follow through to the financial aspect of the closed sale. Its purely for feedback counter of an offline advert that they might run. I think online offers a more speedy, consolidated approach that just works very well.
JustinHarrison said,
Wrote on February 11, 2010 @ 4:41 am
Hi Joan, I agree absolutely, however since this post is about ROI and not taxation and specifically ROI in terms of making campaign decisions, I think its safe to leave the tax debate for another day
JustinHarrison said,
Wrote on February 11, 2010 @ 4:46 am
There are models that you can follow in the offline world if you are smart and you have no choice of trading anywhere but offline… the problem is nobody actually thinks about it or does it.
For example, take out an advert and have a dedicated email address or telephone number for that add so you can track the response rates etc.
You see the fact is, yes we have more options online, but its not because there are no options offline that the online model is better, its the fact that most business owners are lazy and ill advised and therefore don't as you say quantify everything.
Phillip van Coller said,
Wrote on February 11, 2010 @ 4:56 am
Justin, what is considered a bad, good and excellent ROI? Busy calculating ROI for a new product and comparing previous stats from other experiences and the figures seems to be a bit weird. So just wondering what is the possibilities…
JustinHarrison said,
Wrote on February 11, 2010 @ 5:22 am
Phillip for the affiliate model:
* 80-100% ROI is acceptable
* 100 – 300% is good
* 300% + is excellent
For your own product if you work of gross marking (i.e. profit after sale)
* 100% – 200% ROI is acceptable
* 200 – 400% is good
* 400% + is excellent
But again that's my own interpretation, and it really depends on WHAT YOU are prepared to work for…
Trust that makes sense.
malcolmp said,
Wrote on February 11, 2010 @ 5:42 am
Simple really, money you get back, less the money you put in to get the revenue as a percentage.
But all to often the bean counters want to complicate the formula.
KISS – is always something we should remind ourselves of, don't over complicate _anything_!
I like the question and answer on what is perceived as a good ROI.
Phillip van Coller said,
Wrote on February 11, 2010 @ 7:19 am
Thanks man, that really helps a lot!