ROI, Return On Investment, is one of the most used methodologies to gauge the possibility of making a profit on a project or business, or even compare several of them, in order to choose the best one.
This is because this formula is very practical to use.
Actually, it’s quite simple:
Return On Investment formula (as a percentage):
ROI = RETURN – EXPENSES x 100
We multiply by 100 so that the value is represented as a percentage, which is easier to understand, but not everyone does this.
So, to break the ice, let’s imagine a return on investment calculation example, merely illustrative.
Pedro, a little boy from a small country town, decided to earn some extra money for the summer vacation, and set up a small bar at the gate of his house to sell lemonade.
- Portable table and chair and insulated coolers borrowed from his father: $ 0.00
- Cardboard, pens and creativity to write advertising and price posters: $ 15.00
- 5 dozen lemons: $ 80.00
- 10 liters of ice cubes manufactured in the home refrigerator using mineral water (competitive advantage): $ 20.00
- 50 liters of mineral water (comp. advantage) to make the lemonade: $ 100.00
- 2 pounds of sugar: $ 5.00
- 300 biodegradable paper cups (ecologically responsible = market positioning): $ 100.00
Total EXPENSES: $ 320,00
With this, it’s possible to produce approximately 65 liters of lemonade (lemon juice and ice also increase the volume!).
This translates into 260 glasses of lemonade, which he wants to sell at $2.00 each, which equals REVENUE of $520.
If he sells about 26 cups a day, he will exhaust his stock in 10 days, which is his goal.
So, putting this simple return on investment calculation example into the formula, we get:
ROI = 520-320×100
ROI = 62.5%
That is, with each invested $ 1.00, the young Pedro gets back an additional gain of slightly greater than $ 0.62 cents.
In other words: for every $ 1.00 invested he finishes his venture with $ 1.62, making the calculation:
$ 320.00 x 1.625 = $ 520.00.
Of course, this is an example of a purely enlightening Return On Investment for those who didn’t yet know the concept.
Below are other return on investment calculation examples that may be best suited for those who want to better understand what financial management is.
See also: How to start a home business: The 4 VRIO questions
Return On Investment Calculation Example’s
It’s important to remember for anyone who wants to learn how to calculate Return On Investment for projects or companies that a common practice is: To define 3 scenarios.
Pedro simply assumed that he would sell everything he produced in 10 days, but what if it rained during that period, or on the contrary was so hot that his stock ended in 5 days?
So, let’s include this practice in the following return on investment calculation example.
Return On Investment example in a print media marketing campaign
Imagine a shoe brand that has average sales of 100,000 pairs in its summer launches every year.
This brings revenue of $ 1,000,000.00 in this period, which corresponds to a profit of $ 200,000 (around 20%), every year in the summer.
The marketing director decides to launch a new marketing campaign by posting ads in fashion magazines, all produced by their advertising agency.
The total cost of this campaign is $ 200,000.00.
- Pessimistic: 20% increase in sales = Profit of $ 240,000.00
- Average: 30% increase in sales = Profit of $ 260,000.00
- Optimistic: 40% increase in sales = Profit of $ 280,000.00
Note: In this case, the gain from the marketing campaign should be measured by the increase in profit, not total revenue, to justify the investment.
Let’s put it in the formula and see if the the board and chairperson approve the campaign:
- Pessimistic Return On Investment example – Calculation: (240 – 200)/200 x 100 = 20%
- Average Return On Investment example – Calculation: (260 – 200)/200 x 100 = 30%
- Optimistic Return On Investment example – Calculation: (280 – 200)/200 x 100 = 40%
Apparently they will approve this marketing campaign based on this return on investment calculation example. But what if these scenario forecasts didn’t materialize?
This is a risk inherent in every business, and that’s why your sales forecasts should be the best possible. Therefore, they should be based on reliable historical data and statistical software that signal the increase or decrease in demand as a result of marketing investments, among other factors .
Return On Investment example in an online media campaign
The advantage of online campaigns is that you can keep track of the Return On Investment. If the desired scenarios don’t go your way, you can quickly change your campaigns to adjust your investments across different media to improve results.
Look at this return on investment calculation example in 3 different types of marketing investments in online media:
Imagine a company that provides cloud-based BPM modeling software through SaaS, that is: with a monthly fee users are entitled to use the software.
To advertise the business they opt for 3 online strategies:
Create articles for a blog that addresses issues of interest to their audience. They lure customers to a landing page to get them to share contact information such as email and phone in exchange for differentiated materials and experiences, such as e-books or trials.
Ads on Google Ad Words:
Which will route leads to these same landing pages, offering e-books and trials.
Ads on Facebook Lead Ads:
A Facebook integration that allows users to fill out forms in exchange for the same materials and experiences mentioned above.
In this SaaS company, sales funnel analysis shows that 20% of leads to their landing pages fill out the registration form.
So, of these 20%, 40% react positively to emails with information about their BPM tool and of these 40%, another 40% end up buying the product, when they’re contacted by telephone.
Thus, the final conversion rate is 3.2% or (0.20 x 0.40 x 0.40), for each lead that arrives at a company landing page and consequently fills out the form.
For example: out of every 1,000 people who reach their landing page, 32 end up buying the product.
The company knows from its historical marketing investment data over the years that to refer 100 leads to a landing page, it’s necessary to invest individually in each option:
- $ 200 in Content Marketing
- $ 240,00 in Facebook Lead Ads
- $ 300.00 in Google AdWords
(NOTE: this data is totally hypothetical and doesn’t indicate any tendency towards particular investments, they are mere examples!)
As the company’s average product cost is $ 100, this means that 100 leads sent to a landing page will generate, on average, 3.2 sales conversions, that is, a revenue of $ 320.00 (3.2 x $ 100.00).
Therefore, by applying this value in the formula, we can discover the ROI of each investment in social marketing:
- Content Marketing = 320 – 200/200 x 100 = 60%
- Facebook Lead Ads = 320 – 240/240 x 100 = 33.3%
- Google AdWords = 320-300/300 x 100 = 6%
So, after realizing that in this hypothetical return on investment calculation example Content Marketing is more advantageous, the company invests 50% of its budget in this, 30% in Facebook and 20% in Google.
Because after a month of making these investments, the company can analyze the conversion data with the help of analytical tools and other features offered by these media companies themselves and know exactly what the return and conversion rate of each strategy is, recalculating their Return On Investment and reallocating funds.
So, what do you think of these Return On Investment examples to define marketing investments?
Does your company use other types of investment analysis, such as IRR or Present Value? Tell us in the comments!