Will you buy the stocks that are falling?
Will you increase your ad budget if you aren’t getting good leads?
Will you acquire a company whose revenue is declining?
Will you invest in something that’s going to give you 0% return?
Well, that’s ROI basically.
Be it our business or our investments, we only take the leap if we see a good return.
Unfortunately, 70% of businesses & people aim to get a better ROI, but they don’t!
Let’s invest a little time in knowing how to improve your ROI.
We bet your ROI on this article will be higher!
But first, let’s understand what is ROI & how is it calculated.
What is ROI?
ROI (Return on Investment) is the ratio between profitability and the cost of investment. It’s an indicator of efficiency and effectiveness for an organization’s investment, i.e., if you get a high return on investment, your plan is working in your favor.
If it’s a higher figure, your plan is effective. If it’s lower, you might need to tweak your investment plan around. It’s incredibly black and white, and we’re finding that this formula is now outdated.
In today’s age - your return on investment can be measure in terms of:
- Increased profits
- Reduced expenses
- Operational efficiency
- Brand awareness
- Higher sales
- Reduced overhead or production costs
- Higher customer satisfaction
How to calculate ROI?
Formula to calculate ROI
There are originally two methods to calculate ROI
ROI= (Cost of Investment / Net Return on Investment) ×100%
ROI= (Cost of Investment / Net Return on Investment) ×100%
= (50,000/70,000) ×100%
ROI = 71.43%
ROI= (FVI- IVI / Cost of Investment) ×100%
FVI= Final Value of Investments
IVI= Initial Value of Investments
FVI - 14500
IVI - 12000
ROI= (FVI- IVI / Cost of Investment) ×100%
= [(14500-12000) / 12000] ×100%
= (0.2083) ×100%
However, ROI can also be digital.
Digital ROI is what you get back from all the time, effort, and resources you commit to your digital marketing strategy. It isn’t click-through rates, viral impressions, number of followers, or blog views.
Your actual return is backed by finances that are generated after investing in a digital strategy, according to Steph (Nissen) Hermanson from Atomic Revenue.
Steph also finds when companies approach the topic of digital or social ROI, they often find themselves getting lost in vanity metrics like likes, comments, followers, and subscribers. While these metrics are important, they do not equate to a return on investment. They do act as indicators of the effectiveness of a plan and they help you increase your ROI.
What is a good ROI then?
This depends entirely on what the data tells you. The straightforward answer is how much financial gain you get after investing, but you must align your data to your strategy. Even a simple task of reducing overhead costs is enough to give you substantial success. So what it boils down to is what your gut is also saying. That’s why it’s important to strike the right balance between a data-driven approach and an emotion-driven approach.
While it is somewhat subjective, here are the main factors that influence decision-making.
What influences decision-making?
- Capital acquirements - how businesses get capital to invest has a large impact on how the decision is made
- Past experiences and cognitive biases - Someone who is more risk-averse is more likely to make safer decisions that guarantee a lower ROI
- Risk management - Scope and the assessment of the undesired outcome has a huge impact on how businesses make decisions
How to improve ROI in 2023?
Here are the 4 ways to increase your return on investment:
One clear way on how to increase ROI is to grow your sales and generate more revenue, which will keep pushing your ROI ratio higher.
In terms of digital marketing, you also need to look at how much your ad spending is contributing to the revenue. A part of the ad revenue needs to be pumped back into ads to generate more leads.
Once you see the revenue is more than the expenses on ads, it’s always going to be a good growth in revenue for the subsequent months.
Leverage data as a lens
Leveraging data is essential for ROI. Data helps you understand the wants and needs of your customers.
Similar to investing in stock, investing in a digital marketing solution involves a lot of studies. It is impossible to make a plan and implement a strategy without the data and analytics to back it up. They need to be kept in place to keep a pulse on what’s working, what isn’t, and the next step.
In fact, the first step towards maximizing your ROI is by propagating a good data strategy to align it with your business strategy. You have to use data to determine the needs, demands, interests, and expectations of your customers. Once you know these expectations, it’s easy to meet them. You can discover these through:
- Developing customer personas
- Social listening
- Touchpoint maps
- Journey maps
- Predictive analysis
According to mTab, up to 50% of customers lie when participating in customer surveys. They rarely reveal their own feelings or voice their concerns primarily out of politeness and the innate need to become socially accepted. However, the subconscious never lies, and the data reflects on this.
Data brings light to customer behavior and how they engage with your digital real estate. However, you can only go so far when you scratch the surface.
Invest in analytics
If you’re trying to figure out how to improve your return on investment, you need to invest in tools for data analysis. Tracking revenue can be complicated, so you’d also need the talent to back it up.
As Steph mentioned earlier, it’s important to not get lost in vanity metrics.
- Shared posts
- Blog views
- Sales funnels leads
Instead, focus on actionable sales metrics, such as:
- Converting users rate
- Email opt-in conversion rate
- Social media referrals
- Lifetime value
- Acquisition cost
With the right analytics in place, you’re now in a position to drive your team towards value efficiency metrics to drive the highest return.
This more holistic view of your data also allows you to effectively plan your next step, which is figuring out what kind of ROI you want to generate.
Reduce overhead costs (in digital ROI context)
ROI requires the I, investment. Currently, 73% of businesses show no ROI. So, you have to assess your current financial situation and have a look at the overhead costs, i.e., the costs that don’t yield any profit. It’s very easy to say cut down and save up, but it’s important to analyze where the cost is going.
Currently, we’re seeing a lot of costs going into advertising. According to Hubspot, an estimated 60% of digital marketing spending is wasted.
However, nowadays, there’s more risk involved since the budgets have increased significantly. Traditional marketing media spend has decreased, whereas digital is skyrocketing. But while the spending on digital marketing strategies has increased, we’re seeing a reduction of ROI in digital marketing. And businesses aren’t sure why.
Re-evaluate your expectations
When it comes to ROI, it depends on every person to perceive how much is good ROI. For some, 2x might be a good ROI, and for others 10X might still not be a better ROI.
So, it’s always helpful to keep realistic expectations for all the investments you make. It’s always helpful to keep identifiable benefit on all the investments made.
In terms of digital, always map all the channels with the revenue they’re generating. And it’s not only restricted to channels, map the campaigns, the sources of leads, the pages that are giving you conversions, etc.
This will give you a clear picture of where & when to invest in which particular area - so that the benefit is higher & the ROI is better than you expected.
Invest for compund interesting
Where do 90% of people invest their money?
Banks, Fixed deposits, Mutual funds, Shares, etc - all these will give you simple interest on the amount you’ve invested.
However, think of how banks run? They give out loans & then charge us compound interest on the principal amount. Over a long term, say for e.g. 20 years, you’d end up repaying double the amount compared to what you’d pay if they charged simple interest! Yes, the difference is that big.
So, always take the approach of getting compound interest whenever you think of investing, and you’ll see magical returns on your investments.
Rookie mistakes to avoid while considering Investment Plans
Before you dive into what kind of ROI you want to generate, be wary of the risks and the ROI improvement mistakes which you should avoid making.
1. All-in on one solution
One poor investment decision can throw everything off balance. And the whole failure is inevitable, it’s foolish to gamble all of your money on one solution. Even if your intuition is telling you that the solution is the way to go, the better option is to spread your risk and invest in a couple of plans, rather than one strategy. The broader pool could help you achieve a broader understanding of what’s working can even ensure better results.
2. Relying heavily on timing
Mostly, timing is just dumb luck. It is impossible to predict the next well-timed investment. It’s a trap that many businesses fall into. It’s best to invest now but to remember to be patient. Many times, businesses put all the effort into planning out when to invest next, instead of into the high-potential program that requires time and even more effort. Plans take time to develop, and growth takes time.
3. Being risk-averse
By nature, humans are one of the most risk-averse creatures to exist. While this trait is beneficial in survival, it’s not the best when it comes to investments. Investing in “blue-chip,” or safe solutions can lead you to miss out on some hidden gems. It also represents a bias that causes you to overlook talent, as well as profits. Your managers need tools, insights, and skills to look for potential talents and strategies. The only way to get access to that is from a broader subset. This is why we mention the importance of spreading your risk earlier.
Circling back to Digital ROI
As mentioned earlier, Digital ROI or social ROI is what you get back from all the time, effort, and resources you commit to your digital marketing strategy. It’s the art of providing value to customers through digital means. Since social media is the means, we’ll be using the term, Digital ROI to refer to Social ROI.
The formula for Digital ROI is as follows:
With the world moving towards digital, we’re seeing that customers demand a more holistic, multi-faceted experience that delivers value. The generic approach is now outdated. We need tools that engage customers and provide value.
So, we can’t get into a discussion about Digital ROI, without mentioning the Return on Relationship.
When to think of - How to increase ROI?
How to increase return on investment is one of the most common questions and the most important thing about this question is that there is not just one answer or a definite way to tell what good ROI is. The definition of good ROI changes with the ultimate expectation/aim of the investment. It depends on your financial need and several other factors.
However, it’s fairly straightforward. You have to first assess your business, then assess the market and your competitors. After doing a thorough assessment, you’ll find gaps. To maximize ROI, you have to fill them in.
Sustainability and ROI
Due to the competitive nature of the 4th industrial revolution, we’re seeing both increased risk that leads to unsustainable growth- while it works right now, will it work long term? It’s a question you need to ask yourself.
Sustainable development is meeting the needs of the present without compromising the ability of future generations to meet their own needs- with economic prosperity, environmental protection, and social progress in mind.
To achieve sustainability, there needs to be a commitment to transparency and accountability.
Hari T.N. from Big Basket captures the essence of the funding cycle and how it ties in with sustainability.
The funding cycle
The peak of the funding cycle
When the topic of digital transformation first came up in the late 1990s, we were at the peak of the funding cycle, dubbed “Fantasy abandoned by reason.” It’s where we saw a lot of entrepreneurs being fearless and pursuing outrageous ideas.
We mentioned earlier that one of the factors that impact decision-making was acquiring capital- banks at the peak of this cycle (during 2015-2017), were funding many startups. Giving them millions of dollars to businesses and to strategies that weren’t feasible long term.
The trough of the cycle
We primarily experienced this trough in 2020, with the onset of the pandemic and the global lockdown. The cycle was stagnant due to fear, and impulsive decisions that led to high ROIs during its peak now led to high attrition rates.
As you can see, the impulsive purchases from the cycle’s peak weren’t sustainable at all, as it led to a lot of suffering and job loss during the trough. While yes, there was a lot of innovation during the cycle’s peak, how many of these innovations were used during the trough?
Strategies need to follow a win-win-win formula also known as the triple bottom line according to this study. One for economic prosperity, the next for environmental quality, and the last for social equity. However, this unit faced a lot of criticism as there is no standardized unit of measure.
We’re about to experience a peak once again, so we advise you to become aware of the effects of the funding cycle to learn how to grow sustainably.
Smart investors are the ones that learn from the cycle’s trough and induce responsible behavior and spending so that when the cycle is at its most prosperous, they can invest wisely to ensure sustainable growth and a consistent ROI. You might also want to check out this article to learn more about: How you can improve marketing ROI with the help of a creative agency.
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