What is a Return on Investment?
Whether you run a lemonade stand or you manufacture 10,000 units of a product a week, month or throughout the year it’s safe to say that you want to make a return on your investment.
Every personal and business investment is made with the anticipation to earn more money than your initial investment. To put it simply, a return on your investment or ROI is the profit you make after all the costs of doing business are taken into account.
In order to calculate your return on investment accurately all steps in the sales process including sourcing, production, distribution and referral & affiliate payments must be taken into account to track all sales, conversions and referral metrics.
Why You Need to Calculate Your Return on Investment
Calculating a return on investment must take into account all factors from the costs of doing business. If your organization doesn’t have a complete picture of your expenses, you’ll never be able to identify if you’re making a profit, breaking even or have a negative return on investment.
What Information Do You Need to Calculate True Business Costs?
To calculate return on investment you need to know the costs it takes to do business. The most common costs include:
- Employee Wages
- Licenses, Permits & Franchise ees
- Cost of Materials/Products
- Cost of Storage/Building Costs
- Cost of Packaging & Shipping
- Cost of Outside Referrals or Loans
- Additional Ancillary Infrastructure Costs Including Website Hosting/CMS/Database costs
- Ad, Referral & Promotional Costs
While creating a profitable ecommerce store or any other type of successful business sometimes takes a combination of luck, skill & trial and error, when you begin to test and implement marketing strategies and develop your products on new ecommerce platforms is when you begin to get a greater sense of what works and can produce a profit.
With any investment from initial investment to marketing and product optimization initiatives, you want to see profitable results.
How to Calculate Return on Investment
The costs of doing business can be an easy to understand aspect to calculating your return on your investment for your business, marketing and ecommerce efforts, however for accuracy, you need to have reliable data for all aspects of your operations.
The First Method to Calculate ROI
Calculating your return on investment can be accomplished in 2 ways.
In the first formula, we get our return on investment by dividing the net return in investment and multiplying by 100%
The First Method to Calculate ROI
In the second method used to calculate ROI, the return on investment can be reached by dividing the final value of your investment minus the initial investment divided by the cost of investment times 100%.
While the formula to calculate ROI is relatively simple and is an easy to understand method of measuring profitability it cannot give you the data from additional information into how long an investment is held which gives investors a better scope of a businesses profitability over a period of time.
Having Reliable Data to Calculate ROI
Having accurate and reliable data from all sources gives you the ability to gain the true costs of operations.
Whether your organization sells products through your own website, Shopify, Etsy or a third party CPG company handles your sales, you must get complete data on direct sales from each platform your products are being purchased through.
The data gathered from your sales across all platforms including wholesale, retail & 3rd Party e-commerce sites can be used to calculate your return on investment.
Problems With Getting Reliable Data to Calculate ROI
If accurate data can’t be obtained to the true costs of every aspect of your operations from sourcing & production costs to wages and distribution costs, your organization can potentially miss out on increasing profits and revenue through new initiatives or exploiting practices that are working well for your business.
How to Optimize Your E-Commerce Site to Increase Your ROI
One of the most important aspects of optimizing your ecommerce store is to gain better insights into your reported data.
A lot of valuable information and insights can be obtained that your organization can be used to optimize your site content while utilizing keywords and ads that can complement your individual product listings.
Having an experienced ecommerce marketing partner or team that can provide you with insights including KPIs. conversions and valuable keywords can help you quickly establish A/B testing that allows you to optimize your product, collection and blog pages to incorporate additional keywords to help them be found organically, but also to optimize your ad and promotional spending.
Strategies to Increase ROI
Unless you have unique products that no other company can produce, procure and sell your organization needs to implement best practices for every part of your operations to reduce internal costs to maximize profits.
By prioritizing data your business can take a more personalized approach to your e-commerce business with content strategies and campaigns that utilize the insights and data to tailor your online advertising efforts is more than possible to achieve 4 to 10 times the return on investment.
Connecting With Your Customers to Increase ROI
When customers are shopping online for a product to purchase, there are seemingly endless options for consumers to choose from. Creating a personalized approach to your ecommerce products, content and marketing approach helps to limit the percentage of abandoned carts while helping users stay on your pages and finalize their purchases.
Accenture highlighted this in their report that found over 90% of potential customers are more likely to shop with brands who recognize, remember and provide relevant offers and recommendations.
This may sound simple in theory, however multiple aspects must be considered to better connect with your customers, build trust and turn first-time customers into loyal returning customers.
Not all online shoppers are the same. Knowing the needs of every customer may seem impossible because online shoppers differ in their preferences and interests.
This is the biggest challenge online retailers face because they try to create multiple relevant customer experiences to engage multiple customer segments.
This can become a challenge with content personalization, as brands have to create relevant experiences for multiple customer segments. How is this accomplished?
Tracking the Customer Experience
By analyzing user behavior, ecommerce businesses need to track and understand multiple layers of data to better understand customer experience
If your website has a poor user experience (UI), poor navigation or customers have a problem finding what they want, your site will almost certainly suffer in sales.
Accurately collecting data including entry pages (landing pages), exit pages (bounce rate and the pages users visit is a good starting point to better shape your product offerings and your brand to increase your ROI.
This data coupled with additional insights from Analytics can help you identify which organic, ad, referral or social channel creates the most value in sales.
Organizations that have a more active presence on social media even create online polls, email questionnaires and create online focus groups to gain better insights to their products.
Optimizing the Customer Experience
It takes a visitor 5 seconds or less to decide whether they want to even stay on a website or product let alone make a purchase. Whether a potential customer is viewing your products on your website or viewing them through Amazon, Target or a Shopify store, you want to provide a rich user experience while promoting trust in your brand and your products.
Site & Branding Optimization
Does your website look professional? Is it easy to use? To Navigate? Is it easy for users to checkout without interruptions? Major features on websites some organizations take for granted are crucial to the success of a product, website and a brand.
Product & Page Optimization
Creating & optimizing product and landing pages should be one of the highest priorities for any sales team. The former to create a unique and engaging key-word and optimization driven experience and the latter to not only drive organic traffic, but the opportunity to promote your brands trustworthiness while increasing confidence in your brand to lead to additional revenue.
The goal of every business is to make a return on investment but to ensure your business actually making a profit, you need to understand your true costs of operations from employee wages, procurement and production to marketing and fulfillment to get the “cradle to grave’ data to make the best decisions to improve your return on investment.
In future articles we’ll be providing you with blog articles, case studies and white papers that will help you develop a more optimized approach to your e-commerce needs.
The CPG.IO Blog covers everything you need to know about ecommerce. Whether you’re thinking about creating an ecommerce website and selling your products or you have an established company that needs to optimize all aspects of your business; get the information, services and resources you need to succeed.