You cannot manage what you cannot measure, and this is true for you to understand your company’s financial health. This is why knowing how to calculate the ROI (Return on Investment) is a way for managers to measure the effectiveness of their strategies with a focus on the user.
A well-done analysis of this metrics allows you to identify the main sources of income of the business, the most effective channels of communication for advertising your products or services and the performance of your marketing campaigns.
With that in mind, in this post we will explain how to calculate the ROI and clarify why it is currently important to companies. Keep reading to check it out.
How can ROI help good management?
In order for you to better understand this analysis about ROI – and the impact it effectively causes on management – we will divide the topic in two parts.
It permits you to prioritize more profitable investments
Making a business grow with limited budget requires managers to have certain “cards up their sleeve”, such as the use of good management tools and indicators that can provide interesting insights.
In this sense, ROI can help managers prioritize investments. This happens because calculating return makes it possible to map out actions which can really provide results and those which only represent inefficient expenditure.
It contributes to strategic planning
By prioritizing investments, you make it easier to plan your next strategic actions for the business. This happens due to the fact that when you use ROI, strategic planning is not only based on traditions, feelings or empirical experience, but on mathematics.
How to calculate ROI?
Now that you have understood the importance of ROI for strategic planning, it is time to see how you can obtain this data. Basically, the calculus is:
ROI = (Return on Investment – Cost of the Investment) / Cost of the Investment
Then, all you have to do is multiply the result for 100 in order to get to a percentage number. Now let’s imagine you created an app that helps users in sports activities.
The subscription of the full version is US$ 29.99 and you decided to invest US$ 1000.00 on a campaign of sponsored links in order to advertise your service. In the end, you impacted 50 people – in other words, you made US$1499.50. In this case, the ROI of this campaign would be:
ROI = (1499,50 – 1000) / 1000
ROI = 499,50 / 1000
ROI = 0,4995 x 100
ROI = 49,95%
It would mean your company has a return of US$0,50 for each invested dollar — which would mean a small ROI campaign.
As we have seen, learning how to calculate ROI means the manager of the business can analyze investments as a whole or segment this analysis, by looking at each sector of the business in a separate way. This can be very efficiently used for marketing actions and digital sales, when numbers are available in real time. Now that you know all about this metrics, all you have to do is put it into practice!
Did you enjoy this article? So, continue learning about management strategies based on data and check how data processing works in Big Data Analytics!
