Return on investment (ROI)
What is return on investment (ROI)?
Return on investment (ROI) is what an investment leaves behind once its cost is taken out, written as a percentage: profit minus cost, divided by cost. In marketing the cost is the media budget plus the work behind the campaign, and the profit is the margin on what was sold, not the turnover. Use turnover and the number flatters every channel.
Example
A campaign with a €2,000 media budget and €500 of work behind it produces €10,000 in sales. The cost is €2,500.
- At a 40% margin the profit is €4,000. ROI = (4,000 − 2,500) ÷ 2,500 = 60%. Every euro put in comes back as €1.60.
- At a 20% margin the profit is €2,000. ROI = (2,000 − 2,500) ÷ 2,500 = −20%. The same campaign loses money.
Return on ad spend reads identically in both cases: €10,000 against a €2,000 budget is a multiple of five. The number that decides whether a channel keeps its budget is the one that knows the margin.
Why it matters for a business
Three things usually move the result. Hidden costs come first: delivery, returns, payment fees and discounts. Leave them out and the margin is imaginary. Then the period: content and organic search pay back over months, so a monthly figure shows them as a loss exactly when they start working. Third are repeat orders. A customer who buys four times a year makes the first sale an entrance fee rather than the whole story, which is why this number is read next to lifetime value rather than on its own.
The practical fix is dull and effective: one cost line, one margin line, one period, applied the same way to every channel. Otherwise you are comparing a channel charged only for media against a channel charged for media and labour.
What to ask
- Which margin goes into the calculation, and are delivery, returns and payment fees taken out of it?
- Does the cost include the work on the campaign, or only the media budget?
- What period is measured, and is it the same period for every channel?
- Are repeat orders from the same customer counted, and if so, how far back?
The monthly report in our digital marketing work gives the cost of an enquiry per channel; your margin and your repeat orders are what turn it into ROI.