ROI—The Universal Metric

There is one language that is understood universally across companies, and that is the language of finance. Every company is working to maximize its potential value and each one will have a different strategy for achieving this, but at the end of the day, a company can only be considered successful if it can afford to keep the lights on.

Every company has to pay taxes and every company has bills to pay. Some companies may believe in producing products that they want to use, while other companies may strive to provide the best customer experience and service possible—whatever their goals are, companies can only meet them by generating revenue.

ROI provides insights into the overall cost of an investment, taking into account everything from the marketing budget to the costs of equipment and software. There are other variations of ROI where the investment is defined differently. One of the more common variations you may see is return on ad spend (ROAS).

Here is the best way to think of the two. Suppose you are selling lemonade and you spend $25 on flyers that you put up around your neighborhood. Further suppose it costs another $25 to make that lemonade. The money you spend on flyers would be your ad spend, so you would need to make at least $25 to get a positive ROAS, while you would need to make $50 to get a positive ROI. To make this even more interesting, suppose you paid someone $25 to sit at your lemonade stand to sell the lemonade. That is another $25 that may not come out of your ad spend. Now you need to make $75 to have a positive ROI, but still only $25 for a positive ROAS.

ROI and ROAS are calculated as follows:
ROI = ((Revenue - Cost) / Cost) × 100.
ROAS = ((Revenue - Advertising Cost) / Advertising Cost) × 100
Both ROI and ROAS are expressed as percentages, hence the multiplication by 100.

For simplicity’s sake, I will use the term ROI to talk about measuring the value of an investment. Understand, however, that there are several ways to measure this, and your
own organization may have a specific way as well, depending on how budgets are split and defined.

As part of your measurement model, it is best practice to establish baselines. One of the first baselines you should establish is your ROI value. To do this, you will likely run through several stages of your analytics program. Bruce Clay uses the following framework ( that I think works very well:

Determine Needs → Identify Goals → Define Metrics → Collect Data → Record
Baseline → Test Improvement Strategies → Implement Improvements → Measure
Results → Repeat Process Periodically

we talked about understanding your business needs and goals. At this point, we are starting to define our metrics. The first metric we want to define is how to capture an ROI value. We understand how to calculate this, but now we must capture and collect it.

Because ROI is tied to monetary value, we must identify actions that generate measurable revenue. There are two approaches: actual and estimated. Actual ROI is measured when you have direct access to purchase data and the referring lead. For example, offline you can use coupons to measure the direct impact of the source of those coupons.



Subscribe to Developer Techno ?
Enter your email address:

Delivered by FeedBurner