How Do You Calculate the ROI Of Your Business?

A lot of business owners have a gut feeling that their marketing is working. But a gut feeling doesn’t tell you which channels you should continue marketing on, which to cut, and where to put your budget next year. That’s what return on investment (ROI) is for.

The formula to calculate ROI is simple: ROI = (Return – Investment) ÷ Investment x 100.

An “investment” is everything you spent on a project, campaign, or strategy. The return is the revenue generated by that investment. For example, if you spent $1,000 and got $3,000 in return, your ROI of that particular investment is 200%.

The formula itself is pretty simple. The difficult part is ensuring you’re plugging in the right numbers. That’s where a lot of businesses have trouble.

This guide covers the formula itself, what counts as investments and returns for a business, and mistakes that can throw your numbers off.

What Is ROI, And Why Should You Track It?

ROI isn’t a fixed number. It’s a ratio that changes depending on what aspect of business you’re measuring, whether it’s a single campaign, an entire service line, or a piece of equipment that your business purchased. You can express it as a percentage (300%) or as a ratio (3:1).

Likewise, it’s not just a marketing tool. A business owner trying to decide if it’s worth it to keep running their Facebook ad campaign, a salon owner wondering if it makes sense to hire a new stylist, or a landscaper seeing if the business has the means to buy a new piece of equipment are all working through an ROI question.

“One of the first things I ask a new client is what they expect their ROI to look like. That’s before we launch anything,” says Allison Abner, Digital Marketing Consultant at Federated Digital Solutions. “I had a home services client last year who was ready to cut their entire social budget because the cost per click looked high next to search. Once we calculated ROI against closed jobs instead of clicks, that channel ended up outperforming everything else on the account. A number that looks good on the dashboard can still be the wrong number to base your decision off of.”

How Do You Calculate ROI?

Step 1: Add Up Your Total Investment

Add up everything that qualifies as an investment in the project, like:

• Ad spend/media budget
• Staff time spent working on the leads (hourly wage x hours spent)
• Software/tools used to run or track efforts
• Agency/contractor fees
• Materials/production costs

Include every variable when you calculate your ROI. Leaving one out may inflate your ROI, giving you an unrealistic number.

Step 2: Total Your Return

Your return is the revenue or value that is directly tied to what you invested. It’s not your company’s total revenue for the period that the campaign ran. Connecting a result back to an investment is called “attribution.”

For example, if a customer purchased a product after seeing a Facebook ad, but made the purchase because a friend referred them, that sale would be attributed to the referral, not the ad the customer saw.

Step 3: Plug In The Numbers

If you’re not used to calculating ROI, go through the formula slowly, because this is where many business owners get tripped up. Subtract your total investment from your return, divide it by your investment, then multiply that result by 100.

If you invested $2,000 in a project and saw $12,000 in returns, your ROI would be 500% or 6:1. Here’s how:

(12,000 – 2,000) ÷ 2,000 x 100 = 500%

If you’d rather look at it as a ratio: 12,000 ÷ 2,000 = 6, or a 6:1 ratio.

The percentage measures how much you’ve gained compared to what you’ve spent. The ratio tells you how many dollars have returned to you for every one you’ve put into a campaign.

What Counts As Investment? What Counts As Return?

Direct spending is an obvious investment, but business owners often overlook other expenses that qualify equally. These include:

• Staff’s time spent following up on leads
• Subscription fees for software used to manage the campaign
• Design/creative costs
• Management fees paid to an agency

Traditional return is the revenue that your business sees in exchange for what you invested. But just like there are investment blind spots, there’s a blind spot when it comes to returns too, as people often mix up profit and revenue.

Revenue is everything that came in, and profit is what’s left after the cost of delivering the product or service.

Here’s the formula:

Profit = Revenue – Cost of Goods Sold (COGS)

COGS is what it costs to make or deliver what your business sells, like the materials for a product or the time it takes you to complete a service from start to finish.

It’s not uncommon for people to use profit in place of revenue when they’re calculating ROI. That’s the single-most common reason we see inflated ROI numbers, which is why it’s so important to keep these two numbers straight.

“I worked with a client who was calculating ROI using ad spend alone,” Abner says. “She hadn’t included the front desk time spent following up on leads, or the scheduling software she used to book the appointments. Once we added those costs in, her real ROI was still strong, but it was much closer to the number she had in her head. Investment means everything it actually costs you to land the sale: ad spend, staff time, and the tools you used in the process, etc.”

Why Customer Lifetime Value Changes The ROI Math

Everyone wants loyal customers. They bring so much to your business in terms of repeated sales, word-of-mouth marketing, and higher spending.

Customer Lifetime Value (CLV) is what a customer is worth if they keep coming back, rather than just patronizing your business once.

The formula for calculating their value is a little more complex. According to HubSpot’s guide to calculating CLV, there are three main components:

1. The amount that a customer spends per purchase
2. How many times a year they purchase from you
3. How many years they’ve stuck around

If a customer spends $50 four times per year for three years, they’re worth $600 in lifetime value, not just $50 (50 x 4 x 3).

Also keep in mind Customer Acquisition Cost (CAC), the average amount that it costs you to win over a new customer. This formula is total sales/marketing spend ÷ the number of new customers you got from your efforts.

A healthy relationship between CLV and CAC is typically around 3:1, or a customer is typically worth about 3x what it costs to acquire them. If the ratio is lower than that, it’s a sign that you’re paying too much to acquire customers compared to what they’re worth to your business.

“I had a client who almost passed on a lead source because the cost per lead was higher than a cheaper channel they were already using. When we looked at lifetime value, customers from that pricier source were coming back for service two or three times a year,” Abner says. “Running math on lifetime value makes the decision easy for a lot of people.”

What Should You Ask Before Trusting Your ROI Numbers?

Before you make any big decisions based on your ROI, ask yourself:

• What does the average customer spend with me per purchase?
• What is that customer worth across their entire relationship with me (not just the first purchase)?
• How do I measure success each month? Closed sales, units sold, and leads collected are all different measurements
• Have my goals or priorities changed since the last time I looked at my numbers?

What Are Some Common ROI Mistakes?

Here are three worth watching for:

• Making a judgment call too early.

• • • This often happens because people expect instant results, and that’s not realistic. Give a channel an entire sales cycle before you decide it’s not working.

• Comparing revenue across channels that have varying margins.

• • • Revenue is the easiest metric to see after just a quick glance, but it doesn’t tell you the entire story. Compare profit, not revenue, when making the decision on where to place your budget.

• Leaving out costs.

• • It’s easy to forget staff time and software costs, as they don’t show up in the same way that ad spend does. They’re not at the forefront of your mind. To keep them at the top, build a checklist of investment costs before you start calculating.

Measuring ROI was noted as the biggest challenge marketers face today by real, live marketers reporting this year. So, if you’ve been getting this wrong, it’s not a moral failure. It’s tough for everyone!

How Do I Use My ROI Number To Make Better Decisions?

ROI benchmarks give you a valuable starting point. A 5:1 return is generally considered solid, 10:1 is knocking it out of the park, and 2:1 leaves room for improvement, as it isn’t profitable once your real costs are taken into account.

Instead of chasing an external benchmark, though, we recommend you compare your own numbers with themselves over the course of a few years. That’s where the important data comes from.

Keep in mind that different channels operate on different timelines. Quick campaigns like paid ads are worth reviewing on a monthly basis. Slower channels like SEO or sponsorships should be evaluated quarterly.

If Channel A is delivering 6:1 returns and Channel B is delivering 2:1 returns, it’s not a sign to stop all efforts on Channel B. Instead, it’s a sign to look closer, see if Channel B’s customers have a higher lifetime value, and analyze the different campaigns for what they’re worth for the timelines they’re on.

Understanding the ROI formula is the easy part. The tough part is putting it in play in everyday situations and plugging accurate numbers in so you can get accurate numbers out. Reach out to our team at FDS today to take a closer look at the story your numbers are telling you.

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