ROI stands for Return On Investment.
In simple advertising terms, ROI means as to how much profit you have made from your advertising campaigns in comparison to how much you’ve spent on your ads.
To calculate ROI, you basically need two metrics – Revenue and Cost of Goods Sold. If you want to calculate ROI for advertising campaigns, take the total revenue that you generated through ads and subtract your overall costs from it. Finally divide the numbers that got by your overall costs.
To put Return On Investment in the formula, you can use the following:
ROI = (Revenue – Cost of goods sold) / Cost of goods sold.
Let’s take a real example to understand how to calculate ROI
Consider that you have a product that costs $10 to manufacture, and you sell this product for a price of $80. You have sold a total of 50 of your products in the last month via your advertising campaigns, be it from a specific advertising platform like Google Ads, Facebook Ads or others. Your total costs for ad campaigns are $500.
What would be your ROI be?
Based on the formula mentioned above, we need the following:
Revenue i.e. $4000 ($80×50) in given the scenario. And, your cost of goods sold is $1000 ($500 + $500), $500 for ads and $500 ($10×50) to manufacture the products.
So, your ROI would be ($4000-$1000))/$1000
ROI = 300%.
In simple terms, you make $3 for every $1 spend.
You can use the following ROI Calculator to know your actual Returns On Investment: