Advertising services aren’t cheap, so you want to ensure your business gets a good return on its initial costs. Evaluating the performance and impact of an advertising campaign helps you see if the initial value of the investment is worthwhile. It also lets you know how to reach your audience and which advertising strategies work best for your company and are worth repeating.
Your business can’t evaluate the effectiveness of an advertising campaign without measuring and understanding the return on investment. These tactics allow you a fair comparison of different types of advertisements over time so you can determine the best investment for your business.
What is Return on Investment?
As a business owner, you’re probably familiar with terms like profit and loss but may be wondering, “What is ROI, and how does it impact my business?” In plain terms, return on investment (ROI) is a metric used to understand how profitable an investment is.
ROI compares the cost of your investment, like paying for advertisements, with how much you earned back from it. For example, you could determine the profitability of an ad campaign based on sales data while the ads are posted. Measuring ROI helps you judge which investments are successful and most efficient.
How to Calculate ROI
Your business’ ROI can be calculated using a simple formula. It’s essential to know how to calculate return of investment (ROI) for your business so you can evaluate advertising campaigns and your internal rate of return.
Fortunately, it’s easy to make these calculations using the right ROI formula. There are two methods for determining your business’ ROI. In the first method, you take the amount you made from the investment, called the net profit, and divide it by the cost of the investment.
Then, take this amount and multiply it by 100 to see your ROI expressed as a percentage. Investment costs must be divided from net profits because your business may see positive or negative returns.
The formula for the first method looks likes this:
(Net Profit/Investment Costs) x 100 = Your ROI %
The second method for calculating ROI involves subtracting the initial value of the investment (IVI) from the final value of the investment (FVI). Then divide that amount by the cost of your investment and multiply the resulting number by 100 to obtain a percentage.
The formula for the second method is:
(FVI – IVI/Investment Costs) x 100 = Your ROI %
Your ROI calculations can show a positive or negative ROI percentage. A positive ROI means your business turned a profit from your initial investments, while a negative ROI means your business lost money; this is a sign this investment wasn’t worthwhile.
Calculating ROI Over Time
Basic ROI formulas are great tools that allow your business to analyze if its current advertising methods are good investments. But they don’t let you compare your investments over time. To do this, you’ll need to find your annualized ROI. This formula calculates your annual return on investment when the investment is held during the holding period.
The formula for calculating annualized ROI is more complex. First, you divide your ROI net profit by your investment costs and add one to this amount. For the second part of the calculation, you need to divide the number 1 by the number of years your investment is held, represented by the letter n in the formula. Finally, subtract one from this amount.
You multiply the result of the second calculation by the sum of the first. Then, multiply this product by 100 to calculate your final percentage.
The formula for calculating your annualized ROI looks like:
{[1 + (ROI net profit / Investment Cost)] [(1/n) -1]} x 100 = Annualized ROI %
Measuring Your Advertising ROI
Your business’ ROI can be measured for all forms of marketing and advertising. It can also help evaluate coupon advertising campaigns, bench ads, various grocery store advertising methods, and digital marketing. Calculating the return of your business’ advertising investments helps guide your advertising budget and strategies.
Your advertising ROI looks more specifically at the growth of your sales and your advertising costs. To calculate your ROI, you’ll find your net profit by subtracting your advertising costs from your sales growth.
The basic formula is:
(Growth in Sales – Advertising Costs)/ Advertising Costs x 100 = Advertising ROI %
Knowing your advertising ROI can help you choose which methods are successful enough for you to continue using. In addition, it helps your business determine how much money it needs to spend on advertising campaigns to see growth in your sales. This impacts your cash flow and budgeting decisions.
What’s a Good Advertising ROI?
Businesses want to make smart investments in their advertising. Therefore, you need to know that your efforts in advertising your restaurant or real estate agency are making a positive impact.
What kind of ROI ratio or percentage signals a good investment? A good advertising ROI is a 5:1 ratio of sales growth to advertising costs, or about 20% ROI. Of course, higher levels are even better, giving you higher profitability. Ideal ROI rates range between 25 and 50%. Advertising campaigns in this range are performing great, and your business should stick with them.
Poor ROI Rates
ROI ratios of 2:1 and below, where advertising costs exceed more than half the profits your business receives from sales growth, are signs of bad ROI. You are still making a profit from the advertising campaign, but not at a high rate. Low ROIs indicate the method of advertisement isn’t working well for your business.
Get a High ROI with IndoorMedia
IndoorMedia understands the importance of getting a good ROI for your business’ advertisements. We use hyperlocal targeting and proven strategies to design coupons and shopping cart ads that generate new clients and sales for businesses like yours. So put our 30 years of experience to the test in your next advertisements.
By Roger Anderson
