Any time you spend money, you want to make sure it’s a good investment. Measuring that requires understanding what is ROI, and what is a good ROI.
ROI is one of the most important eCommerce KPIs and it needs to be measured and evaluated regularly.
Keep reading to learn what a good ROI can be and when you may want to pull back on an investment to save yourself money and time.
ROI Analysis
You can calculate how good (or bad) your ROI is on a certain investment by performing an ROI analysis. Analyzing your ROI requires taking a look at the final percentage and then comparing that to the initial investment you made to determine whether or not it was a good investment to make.
There are many variables that can go into an ROI, and analyzing it can be done in one of two ways. First, you can compare your ROI during different periods of time, compare it to another company, or to the industry average. Second, you can break down the investment into different parts and look at the ROI of each one. For example, you may need to measure the ROI of investment in software for your company. It could be beneficial to break that down by software. You may find that your team works better using Google Docs instead of another document-sharing platform, or that QuickBooks has saved your finance department a lot of time and money by automating several tedious accounts payable processes.
Once you’ve performed your ROI analysis, you and the rest of your executive team can look at each investment to decide whether or not it will benefit you to continue that investment or to reallocate money. Just make sure to also consider the value of the investment and not just the ROI. Sometimes the value could be more valuable than that ROI percentage, depending on what the investment is--and the ROI could always increase over time, as well.
For example, you may not get a great initial ROI on a new hire. It takes time to train them and to get them fully involved in the company. But if you wait to measure their value after they’ve been with your organization for a few years and you’ve invested your money into training them and providing benefits, you may find that they have brought immense value to the company through their hard work and dedication.
What Is A Good ROI Percentage?
Determining a good ROI is hard, as it depends on several factors such as the type of investment, your financial need, and more. For stock market investments, anywhere from 7%-10% is usually considered a good ROI, and many investors use the S&P to guide their investment strategy. There are other types of investments you can make and those have different expectations, such as:
- Government bonds can produce a return of around 5%.
- Real estate investments can yield anywhere from 8.6% to 10%, depending on the state of the market.
- Certificates of deposit come with a guaranteed rate of return, and that increases with the amount of time you choose to invest your money.
- Riskier investments may provide an even higher yield, but the risk involved may or may not make it worth it for you.
Other Aspects to Consider
Keep in mind that some investments have high initial costs, so sometimes a high ROI percentage may not be enough of a reason to do it. For example, if you’re buying a new piece of property, but have to finance the cost of it with a high interest rate, that ROI may not have enough value to make it worth your while. Your high ROI also should justify your opportunity cost of investing, which means you’ll spend money to make the first investment and then don’t have the funds to invest in something else.
Other concerns when investing can include net present value (NPV). This means that your investment will lose value as time goes by. In other words, $5 now will not be worth $5 in a few years. You will have to calculate an estimated discount rate as well as the modified rate of return to determine an expected return over time. If you think you may not be able to recoup the investment or the ROI won’t be high enough, then you should consider other investments.
Also, you’ll need to remember that ROI does not involve risk. You’ll need to consider that property can be destroyed in natural disasters, the stock market can dip unexpectedly, or laws could affect certain investments. If you can understand the potential reasons when to say no to a good ROI, that can help you in the long run with your investments and bottom line.
What Is a Good ROI for a Business
As a business owner or investor, you should take a look at your ROI regularly. It gives you an objective look into how the business is doing. Plus, the overall ROI usually shows how well your C-suite or management are performing in their jobs. For each facet of your business, that expected ROI may change depending on the department.
What Is a Good ROI for Advertising
Advertising your business can be tricky, especially if you don’t use the most effective methods possible. You’ll have to examine all of the available avenues to figure out which one is the best for you, and this may take some trial and error to find out which methods have the best returns. Overall, you should try to get an ROI of anywhere from 25%-50% on your eCommerce PPC advertising. To measure that, you’ll need a way to track how your leads are coming in, so make sure to set that up when you start your advertising campaign. If you decide to use an advertising agency, you’ll need to factor in the cost of hiring them as well.
What Is a Good ROI for Marketing
For a marketing campaign, you should strive to make more than a dollar for each dollar you allocate toward it. How you regain that money depends on what types of channels you use for marketing. Print, TV, digital--all can contribute to this ROI, and some may be more expensive than others. For example, a TV commercial can cost thousands of dollars to make, and even more thousands (in some cases, millions) to run enough times to make an impact on your intended audience.
In your marketing campaign, you will need to measure each type to help figure out which one is providing the best ROI. You may find that digital marketing is the most lucrative option over print or TV. Plus, platforms like Google Ads make it easy to track your ROI. It may be more difficult and take more time to determine ROI from content marketing, as that relies on organic SEO data that can take several months to build.
Overall, when it comes to marketing ROI, you should try to get a ratio of 5:1, or $5 for every dollar you spend.
Let Your Money Work For You
If you’re not sure where to turn when it comes to running your business or marketing it, a company like BlueCart can help. In one convenient place, you can track sales, accept payments, monitor your website, and more.
Frequently Asked Questions About High ROI
What Is a Good ROI?
Good ROI is considered to be about 7% or greater for businesses.
What Is the Best ROI?
Theoretically, ROI can be infinite. However, the best ROI is probably the one that is done with sustainability in mind. If you manage to get a high ROI for your business idea while also creating a sustainable business with good structure and processes, that is the lasting path. Aiming for a high ROI while ignoring fundamentals can be disastrous for a business.
Is 50% a Good ROI?
ROI of 50% can be considered good, but there are other factors to consider to understand if your investment was a good one. You should also compare your ROI from previous years to get a better understanding.
Is 30% Good ROI?
An ROI of 30% can be good, but it can depend on how long your ROI has been at 30% in previous years. A 1-year ROI of 20% compared to 3-years of a 30% ROI can be considered a better investment.
What Is a Good ROI for Wholesale Distributors?
The return on investments in the wholesale sector is around 10%. Wholesale businesses usually have lower ROI compared to retail companies. That’s because their profit markups are lower. However, distributors are perfectly capable of achieving high ROI with the help of automation, good management, and efficient software solutions like BlueCart. In order to achieve high ROI, wholesale businesses need to adapt to the demand of the market, grow their product catalogs, focus on sales, and source high-quality products. This will allow them to increase their revenues and net profit margin percentage.
How to Calculate ROI?
ROI = (gross return – cost of investment) / cost of investment. That is the standard formula for calculating ROI. Another formula is ROI = net return / cost of investment. Here’s an example. A business generated $1000 in gross return. The cost of investment was $600. That means the net return was $400. 400/600 = 0.667 or 66,7% ROI. Needless to say, that is a very high ROI and most businesses will be envious if they achieve such numbers. When calculating ROI, it’s important to keep in mind that all expenses (rent, utilities, labor, etc) should be considered and not only the price of the product.
How to Achieve High ROI?
There are two main ways to achieve high ROI – to increase gross return or to decrease the cost of investments. The former case suggests that the company can achieve high ROI by increasing its revenue. However, if the revenue is increased as much as the investments, the ROI will remain the same. Thus, increasing the revenue should be accompanied by a lower increase in the cost of investments. The other way to achieve higher ROI is to decrease the cost of investments. That can be done by automating certain processes, cutting costs, streamlining operations, and various other ways that improve the efficiency of the business.