As a business owner or someone looking into how to start an eCommerce business, you’ll make many investments throughout the course of your professional life.
It’s important to measure how viable those investments are and if they’ll provide you value in some way--otherwise, you’re just aimlessly sinking hard-earned money into something without knowing how it will benefit you. In other words, you need to know what your return on investment (ROI) will be and what is a good ROI.
Learn about what is ROI, why you should focus on ROI, and why it’s incredibly important to you and your business.
ROI Definition: What Does ROI Stand For
You likely hear the ROI acronym used a lot in business circles, but what does ROI mean exactly? ROI stands for return on investment, which is used to measure the profitability of your investment or how efficient it is. If you’re calculating the ROI on a particular investment or investments, you take the amount of the return or benefit and divide it by the cost of your initial spend. That value is then expressed as either a percentage or a ratio. You can then use this percentage to measure how much of a profit you’re getting from your initial investment.
Many business owners find ROI useful as it can be used to compare the value of many different types of investments across the board, from staffing efficiency to marketing spend to investing in other businesses. Think about it as how to calculate margin, but for anything you invest in.
However, there are some limitations of ROI. For example, one investment may seem to yield a higher ROI than another, but it doesn’t account for how much time passed. Sometimes, you will have to consider how much time it took to get your ROI in order to determine how truly efficient it is.
Looking at the overall ROI of your entire business will take some time. You have to examine budgets, how much you’re spending on staff salaries, what you pay to vendors and third-party providers, and so much more. All of that factors into your business ROI. You have to take a look at sales and determine how much profit you’re actually making in order to see that full ROI.
If the ROI is not as high as you’d like it to be, then you may have to take a deep look into your eCommerce KPIs to determine which parts are giving you the best value, and where you may be able to cut some costs. Improving your profitability means that you can end up with a better ROI, which makes your business more attractive to shareholders and investors.
If you want your business to grow, then you need it to appeal to the people and investment bankers who provide you with additional funding. Aspects of your business that can affect your ROI include:
- Staff salaries
- Staff efficiency
- Employee turnover rate
- Equipment costs
- Price of your goods or services
- Wasted marketing spend
Improving Your ROI
If you discover that you need to improve your ROI, there are some tried and true ways of going about it.
For example, if you discover that your business has a high employee turnover rate, resulting in higher costs to train and onboard new employees often, you may need to examine the reasons that people are leaving. Add in employee loyalty programs, increase benefits, or adjust company culture. Those will have upfront costs but could result in a higher retention rate and keep good employees around.
You could also try increasing the price of your goods or services by a certain percentage. If you can raise the price enough, but still keep the sales rate the same, then you’ve increased profit immensely.
Most companies spend a decent amount on eCommerce marketing, whether it is business to business (B2B marketing) or direct to consumer (DTC marketing). Putting that money into digital marketing should hopefully provide you with a decent ROI. That ROI will then drive decisions made by the executive suite, but you’ll need to measure it on a routine basis to make sure it’s still giving you the same value.
Tracking each facet of your marketing efforts is important as well. You need to know which method is the most effective. If you only track your total marketing spend, you can’t discover where most of your leads are coming from. You could end up discovering that your Google Ads spend is not as effective as your paid social ads, or vice versa. If you’re putting more money into Google Ads and eCommerce PPC, then calculating that ROI could show that you need to allocate that money to another source.
Measuring the ROI of your search engine optimization efforts (eCommerce SEO) is something that will likely take some time. It can take a few months for organic leads to begin coming in, as it takes Google and other search engines a while to index and rank your new content for various SEO terms on your website. You’ll want to set up tracking on these leads and also determine how much money they bring into your organization before figuring out how much SEO is helping your company. Investing in SEO is generally a good strategy, but it won’t get the quick results that you may need. In this case, it may be beneficial to not only calculate ROI, but also the rate of return (RoR). That RoR takes a project’s overall time frame and brings that into the equation. SEO may involve a few different costs, such as paying salary for a content writer, an SEO tech, and a website developer. Usually, the leads that come from SEO are high-quality and prove to be a good investment.
Social Media ROI
Social media can be a great tool for building an audience for your business. Like SEO, it can take a while to see the potential ROI from social media, especially if you’re just starting a new account or branching into a new platform. Many companies also use paid social media ads to bring in people from their target market.
You’ll want to examine the ROI from both organic and paid social efforts, as well as break it down by platform to determine the best way to spend your time. Looking at that type of data could show that one platform is better than others at generating new leads. Platforms that businesses and industry leaders commonly use include:
Depending on your business social media presence, you may need a full-time social media manager to handle it all, which would be another cost to factor in when calculating the overall ROI of social media.
Email Marketing ROI
Another way marketers try to reach people is by sending out eCommerce email marketing, particularly drip campaigns. These emails go out to people all along the buyer’s journey, from awareness to consideration to ready to purchase. They are designed to keep the buyer thinking about your company, but how can you know if they’re effective at all?
You’ll have to look at metrics like open rate and click through rate to determine first whether people are even looking at the emails. If they aren’t, then your marketing team might need to run some A/B testing to figure out what could be more effective. If the open rate and clickthrough rate are decent, then you need to examine the conversion rate. That will determine how much of a profit these emails are generating for your company. If they aren’t doing much, then it may be of benefit to reexamine the email strategy and content.
Return to Sender
Learning about ROI and knowing how to calculate it can help your business grow and flourish. If you need help with your eCommerce business and increasing efficiency, consider partnering with a company like BlueCart that can help you with your online presence, send emails, handle all of your billing and payments for you, and so much more.
Frequently Asked Questions:
What is the ROI Meaning?
ROI is also known as "Return on Investment" and it's a type of performance measure that is commonly used to evaluate the profitability or efficiency of an investment. ROI can also be used as a comparison measure for different investments.
How Do I Calculate ROI?
You can calculate ROI by subtracting the initial investment from the net return (or final value of the investment) and dividing the net return by the cost of the investment and multiplying it by 100.
What is Considered Good ROI for a Business?
An ideal or good ROI for a large business should be 10% or less. A good ROI for small businesses should be between 15-30%, this is due to the fact that small business owners tend to take on more risk.