The coefficient of return on investment is applied by investors and marketing specialists to give an assessment to any given campaign. ROI – what is it as it is used and what this indicator is necessary for, can be interesting both to experts, and beginners in the sphere of trade and not only.
What is ROI?
Many experts argue on need of use of ROI. The indicator of Return on investment, or payback coefficient, has also supporters, sure that it is necessary for assessment of usefulness of investments, and the opponents considering it inefficient as the objectivity of assessment depends on the person making the report. Actually the coefficient shows SWARMS, concrete investment is how profitable or unprofitable, it is measured in percentage terms. For calculation of ROI it is necessary to know two indicators, it is the size of investments and estimated income from them.
For what ROI is necessary?
The indicator of financial usefulness can be calculated for any monetary investment both for a certain period, and for all action in general. The coefficient of return on investment can show how many income each spent dollar will bring. If ROI is too small, it means that process is inefficient, and it is unprofitable to make investments in it. It is necessary to consider also the fact that the indicator SWARMS can not always show a full picture of the events. In its calculations it is impossible to consider many factors influencing the course of business. Most of all ROI is effective:
- in work with claims;
- at direct and "cold" sales;
- for stimulation of sales market of products;
- in the special programs which are adjusted on increase in loyalty of clients.
What does ROI indicator influence?
The coefficient SWARMS best of all is suitable for calculations of the analysis of advertizing projects and investments in business. For it it is necessary to consider all expenses which are planned to be spent for the project, and most expected profit on a campaign. The coefficient of return of investments influences the decision on payback of activity of the organization or advertizing projects. From it depends what percent on income it is necessary to receive for invested funds. The more SWARMS, the action is more profitable. If ROI negative, it is necessary to take measures for increase in income urgently.
Pluses and minuses of ROI
The opinion of potential investors for assessment of profitability of capital investments in any given action depends on ROI, it is coefficient which can show a real picture of payback of the project. Many opponents of an indicator of efficiency are sure that SWARMS cannot be counted in the long term on the near future, it is static. Minus of coefficient can be considered also need of additional calculations for obtaining full information on efficiency of the concrete transaction. Understanding that such ROI in marketing, it should be noted pluses of this indicator:
- Possibility of the choice of a period of time for payback assessment.
- With the help SWARMS it is possible to consider all types of income planned to receive from investments.
- ROI helps to make the comparative analysis of several options of investments and to choose the best.
- The calculation formula SWARMS can change depending on a specific situation.
When does not ROI work?
Not always the indicator of efficiency can provide the picture reflecting the real situation. The return coefficient – rate of return will not work in such situations:
- when purchase happens gradually or through some time;
- at a big difference in the sum of transactions.
How to consider ROI?
ROI formula allows to pick up option of calculation of efficiency depending on a specific case easily. Experts apply the following option of calculations: the difference between income and the size of investments needs to be divided into the sum of investments and to increase by 100. The received figure as a percentage will show on how many income during the counted period will increase. It is possible to give the following calculation of ROI as an example what the figure is at once it becomes clear:
- The company offers work to bloggers and pays a certain reward for placement of rollers of advertizing character.
- The cost of advertizing is $200, income was $500.
- We consider return on investment coefficient, so, it will make: (500-200)/200х100%=150%.
- We draw conclusions concerning the necessary measures capable to lift the received indicator or not to lower it.
How to raise ROI?
In difficult situations when payback coefficient insufficiently high, it is possible to take measures for its increase. For this purpose it is necessary to understand what is SWARMS and what indicators influence it. The list of actions which should be held right at the beginning for correction of a situation.
- The analysis of investments and expenses will help to understand a situation and to reveal weak points to which it is worth paying attention.
- ROI will help to increase the plan of measures directed to decrease in expenses and economy of the budget that specifically it can give, depends on campaign type.
- Crisis response measures which will help to increase income – a good way to lift an efficiency indicator, but to work they can begin not at once, it should be considered at calculation of estimated profit.
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