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understanding roi

A huge aspect of Digital Marketing is calculating your ROI.

ROI, as many of us know, stands for Return On Investment. Meaning, how much money do you get back when you put money into your business.

Well, it turns out, some of the most successful companies get ROI wrong. And you might be getting it wrong, too.

You might be thinking, so what? You don’t need to be 100% right to get a good sense of ROI.

Just a close approximation will be enough.

What if I told you that you could have your ROI so wrong that you think something is profitable, and it is not. And, maybe even worse, you stop doing something you think is failing, but it’s really making you fist fulls of cash.

Well, that sounds like one of the absolute worse things in business. Let’s figure out what ROI really means.

ROI, is an often used term that is often misused.

Return On Ad Spend

abacus

ROAS is usually what people mean when they say ROI. This means how much money your Ads bringing back to you. If you pay Google a dollar for an ad, how much are you getting back?

What’s acceptable to you depends on your business.

If you are selling a digital service or consulting, you have very little overhead. Your operational costs are pretty low. So a ROAS of 1.25 to 1 is pretty good. Every dollar you spend you get back a dollar and a quarter. Not terrible.

But if you make actual products, you’re spending a ton of money just to operate. Now a ROAS of 1.25 to 1 is terrible. Maybe even 4 or 5 to 1 is not enough.

I’m about to throw you for a loop with another aspect to consider to really figure out ROI. Before I tell you what it is, I want to give you a scenario.

man thinking

Let’s say you have an ROAS of .5 to 1. Meaning every dollar you spend you only get 50 cents back. You’re losing money. Clearly a terrible spot! You’ll be out of business in no time! Right?

Not exactly.

What if the customers you got from these Ads kept buying from you. They kept coming back again and again. They became Repeat Business.

Well, other than losing money on that first sale, these customers would start making you money over the next couple of sales. And what if they buy from you for years.

You’re making some serious money. So much that you’re ready to throw ROAS in the trash.

Don’t do that. ROAS still gives us a fantastic framework to live in.

This repeat business is called LTV, or Life Time Value.

road bike

Having a good LTV can offset even the most negative ROAS.

To get a good sense you need to be able to answer these questions :

  • How often do these repeat customers order?
  • How long (weeks, months, years) do they order?
  • How much do they spend?
  • How often do they refer others?
  • How much do these referrals spend?

Once you have this data, you’re ready to get a real grasp on your ROI. You can easily find out that your once negative ROI is actually absurdly profitable. You just need to keep doing what you’re doing.

If you didn’t have this information you would be changing things that are making you money. Instead of growing, the goal of any business, you’d actually be shrinking.

This complete grasp of ROI helps you see the long term value of what you’re doing. So, even if you are losing money right now, you know in time, you’ll be having absurd levels of success.

Maybe it’s time to take a closer look at your ROI?

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