John Wanamaker once said that “Half the money I spend on advertising is wasted; the trouble is I don't know which half.” Unfortunately, many people who work in e-commerce face this situation. Did you know that the lack of analysis of data regarding the functioning of your e-shop can trigger the loss of some of your revenue and customers? How to avoid this?
ROI - keeping an eye out for your e-commerce
ROI (Return on Investment) is one of the most important indicators of the profitability of online activities. It shows the level of profits that have been gained thanks to specific promotional activities. By analysing the ROI, you will get to know what income each penny invested in advertising has generated.
How to calculate ROI?
Calculating ROI may cover many aspects of running an online shop. Therefore, you must define the purpose of the analyses very carefully so that the analysed ROI provides reliable information for you.
Before you start calculating, consider which online activity channel you want to measure - social media, email marketing, paid ads or organic traffic.
The basic formula for calculating ROI is:
When the ROI result is at a low level, it means that the expenses incurred exceeded profits. In turn, a high ROI value indicates a low cost of obtaining a lead. The higher it is, the better it is for the profitability of your e-commerce activities.
When calculating ROI in e-commerce, don’t forget about relating its value to indicators such as:
- CAC (Customer Acquisition Cost),
- LTV (Customer Lifetime Value).
For example, when you know that the lifetime value of a client acquired in a paid advertising campaign on Facebook is £200, and you have paid £50 for its acquisition, then the ROI of this investment is 300%. It means that every £1 you invest will earn £3 for you.
Such an analysis gives a comprehensive view of the effectiveness of marketing campaigns run in specific channels.