What is ROI?

ROI as of Return on investment  is a metric that’s used to evaluate the profitability of an investment, such as an ad campaign. It helps e-commerce businesses to see if the return they’re generating is relative to the money they’ve invested. 

How to calculate ROI?

To calculate your ROI, you can divide your net profit by your cost of investment. Then, you multiply the answer by 100 to express it as a percentage. 

Why is ROI important in e-commerce?

In e-commerce, ROI helps stakeholders to compare different investments. It’s especially useful for evaluating the performance of your marketing campaigns, helping you to make more informed decisions with regards to how much funding you should allocate to certain strategies and channels like paid ads, SEO, social media marketing, etc. 

What are the limitations of ROI?

When you’re measuring and interpreting ROI, you need to keep in mind the following limitations  which can impact its accuracy and usefulness:

• ROI ignores the time period of the investment. It typically focuses on short-term gains and ignores long-term value. In e-commerce, customer journeys can be nonlinear and long which means that the immediate ROI may not reflect the long-term value of an ad with the object of creating brand awareness. 

• It fails to take into account intangible, but essential, benefits that are difficult to quantify like brand awareness, customer loyalty, brand trust, and customer satisfaction. 

• It’s difficult to attribute revenue to a single marketing channel. For example, a customer may discover a product via a Catalog Ad, but buys the product during an in-store visit. 

• Many times investment cost excludes returns, cancellations, or refunds. Plus, some costs like customer support can be more difficult to measure. As such, the ROI can be inflated. 

Best practices for improving ROI

Segment and personalise marketing efforts

Personalised campaigns that target customers using factors like demographics, purchase history, age, etc. help to increase relevance and engagement. For example, when you’re using paid ads, you can use retargeting ads to deliver dynamic content based on their recent user behaviour on your website or within your app. 

Optimise conversion funnels

Increasing your conversion rate will have a positive impact on your net profit. To do that, focus on your website’s user experience (UX) and checkout process. Areas that typically cause friction and prevent customers from buying a product include:

• Website speed

• Mobile responsiveness

• Navigation

• Payment methods

You want to create a website that’s easy to navigate across all devices and loads quickly. Then, when a potential customer wants to checkout, they should be given only a few fields to complete and a selection of different payment methods. 

Continuously adjust budget allocation

Use ROI to base your ad budget. When you pick up that a campaign underperforms, pause it and shift your spending to a campaign that’s showing a higher ROI. Then, when there’s a high-conversion period like Black Friday or an end-of-season clearance sale, you want to capitalise on these events by strategically increasing your budget. 

Learn how DPA (Dynamic Product Ads) help you deliver personalized product recommendations at scale here.