What is ROI analysis? From the basics of marketing ROI calculation to improvement approaches that lead to business growth

In today's world where customer touchpoints have become increasingly complex, accurately visualizing the return on investment of diversifying marketing initiatives is an unavoidable challenge for companies to grow their business.

Rather than simply reviewing measures, a detailed ROI analysis is essential to correctly evaluate which measures truly contributed to profits and use this to make the next investment decision.

In this article, we will thoroughly explain everything from a consultant's perspective, from the basic overview of ROI to specific steps for calculating marketing ROI that can be used in practice, as well as the limitations of traditional analysis using a single indicator and practical approaches to overcome them.

ROI Analysis Basics: What is ROI? How is it different from ROAS?

First, let's clarify the basic concepts that form the basis of "ROI analysis" and the difference between it and "ROAS," which is often confused in the marketing field.

Definition of ROI (Return on Investment)

ROI stands for "Return On Investment" and means "return on investment" or "cost-effectiveness." It is an extremely important indicator for measuring "how much profit is generated compared to the costs invested" in business investments, tool introductions, and all marketing initiatives.

The higher the ROI figure, the higher the profitability and the more efficient the investment of the measure. ROI analysis is a method of using this ROI to objectively evaluate and compare the cost-effectiveness of each measure.

The difference between ROI and ROAS

An indicator very similar to ROI is "ROAS (Return On Advertising Spend)." These two are similar but not the same, and you need to use them appropriately depending on your purpose.

• ROI: It represents the ratio of profit to investment costs (measures the profitability of the entire business).
• ROAS: It represents the ratio of sales to advertising expenses invested (measures the performance of a single advertising campaign).

It is not uncommon for ROAS to be high, but after deducting the cost of goods and other expenses, the company is actually in the red. In order to evaluate the sustainable growth of a company or business, ROI analysis using "profit" that is more accurately measured and directly linked to management indicators is essential.

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• MROI (Return on Marketing Cost)And
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Why ROI analysis is important in marketing

The reason why ROI analysis has become important in marketing is likely due to the diversification of marketing strategies.

In recent years, the number of elements and options for marketing measures has been increasing, including the diversification of marketing tools, the lengthening period until reaching a sales negotiation, and the complexity of the action flow. In proportion to this, when numerous measures of different scales and forms are taken, it becomes more difficult to understand how effective each measure is.

ROI analysis not only quantifies the effectiveness of these measures, but also makes it possible to compare the effectiveness of measures of all sizes and shapes using the same criterion of "profit." As a result, companies can focus their capital on measures with higher profit margins, leading to the implementation of more effective marketing measures.

ROI calculation method and examples

We often receive inquiries from people who say, "I understand the importance of ROI analysis, but I'm not sure how to actually calculate it." Here, we will explain the basic steps for calculating marketing ROI.

Basic ROI Calculation Formula

First, the basic formula for calculating ROI is:

ROI (%) = (Sales - Cost of Sales - Investment) ÷ Investment x 100

The "Sales - Cost of Sales - Investment" part of this formula refers to pure "profit." Therefore, in a simpler way in the marketing field, the formula is as follows:

Marketing ROI (%) = (profit gained from marketing efforts) ÷ marketing investment × 100

Example: Analysis and verification simulation using ROI

For example, let's assume that you have implemented three marketing initiatives, A, B, and C, which are different in scale and format, and perform an ROI analysis.

• Measure A: Investment amount: 100 million yen / Profit brought in: 300 million yen = ROI 300%
• Measure B: Investment amount: 300 million yen / Profit brought in: 450 million yen = ROI 150%
• Measure C: Investment amount: 200 million yen / Profit brought in: 100 million yen = ROI -50%

From the results of this ROI analysis, it is clear at a glance that "Measure A" is the most profitable and has the best investment efficiency. When allocating a limited budget, the logical decision is to concentrate resources on Measure A first.

On the other hand, for "Measure C" with a negative ROI (in the red), rather than immediately stopping it, it is necessary to dig deeper into the reasons why it was ineffective (whether it was a mistake in target selection or a problem with the creative).

In this way, the greatest benefit of calculating marketing ROI is that it allows you to compare and verify measures of all sizes and forms using the same standard (playing field) of "profit."

An approach to improving marketing investment based on ROI analysis

Once the current situation has been visualized through a detailed ROI analysis, the next step is to take action to improve the figures. The most common approaches to improving ROI can be broadly divided into the following four categories:

1. Optimizing investment allocation: Based on the results of the ROI analysis, the budget for inefficient measures is reduced and the budget is reallocated to more efficient (high ROI) measures.
2. Increased conversion rate (CVR): We will review our target demographic and conduct A/B testing of creatives to create a system that will generate more profit (conversions) with the same investment amount.
3. Increase average customer value (LTV/AOV): By creating a cross-selling and upselling system, profits per customer can be increased without changing the cost of each acquisition.
4. Review of cost structure: Reduce costs without compromising product quality, or reduce hidden costs (such as labor costs) associated with operating and maintaining tools.

It is important to combine and implement these improvement measures in accordance with your company's business model and market environment.

Articles that will help you optimize your budget allocation.

• How to determine and decide on the optimal marketing budget allocation

Three limitations and points to note about traditional ROI analysis

So far, we've explained basic marketing ROI calculations and how to use them, but in today's complex marketing environment, ROI analysis based on simple division alone carries the risk of misunderstanding. To make advanced decisions, you must keep in mind the following three limitations (points to note):

Limitation 1: Evaluation of indirect and long-term effects that are difficult to quantify

ROI analysis is a method to clarify the cost-effectiveness of "quantifiable benefits." Therefore, it is important to note that it is not suitable for analyzing benefits that cannot be quantified.

For example, it would be difficult to quantify things like requests for product information or inquiries, or increased awareness of a product or company. To analyze these, you need to use different indicators.

Therefore, it is important to use a variety of indicators in combination to analyze all marketing initiatives rather than relying solely on ROI.

Limitation 2: Inability to see interactions between multiple channels (halo effect)

In the case of "a customer saw a YouTube ad, became aware of the ad, and then performed a name search a few days later and made a purchase," the ROI of the final result (search ad) tends to be unfairly overvalued. It is difficult to understand the synergistic effects of multiple measures through simple ROI calculations.

Limitation 3: Cannot eliminate external factors such as weather and competitor trends

Was the reason for a significant increase in sales due to "excellent marketing measures by your company," "a competitor running out of stock," or "a coincidence of large temperature fluctuations"? A simple ROI analysis cannot separate out the "baseline boost" caused by these external factors and measure the pure effect (lift effect) of a single measure.

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Summary: From simple calculations to ROI analysis for decision-making

In this article, we explained the basics of ROI analysis, provided specific examples of marketing ROI calculations, and discussed the modern-day barriers to analysis.

Visualizing the profit contribution of each measure through ROI analysis is the first step in marketing activities. However, in today's world where customer behavior is becoming more complex and various factors are intertwined, companies that do not just evaluate using simple formulas but also adopt integrated analytical methods that include "external factors" and "indirect effects" have a competitive advantage.

If you are a manager or marketer who wants to evaluate the effectiveness of all marketing initiatives on a horizontal basis and make optimal budget allocations based on objective data, we encourage you to consider a next-generation approach using data science.

At XICA, we comprehensively analyze the "ripple effect of advertising measures" and "the impact of external factors such as weather and competition," which are not visible in traditional simple ROI calculations, and derive the optimal budget allocation to maximize sales.Marketing Mix Modeling (MMM) analysis platform "MAGELLAN"Is provided.

Author information

XICA Co., Ltd. Marketing Team