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Home > Industry Insights > What Is the Formula To Calculate eCommerce ROI?
Calculating the return on investment for your eCommerce business using suitable ROI formula is truly significant for you to know your marketing impact and performance throughout different strategies. This can be just about as basic as understanding the effect of a brand new UX change or as perplexing as calculating the ROI from an entire PPC campaign. However, the real question here is - is it really worth the money or time invested into it?
Further Reading: What Is eCommerce ROI & How You Can Calculate It?
Obviously, the calculation of eCommerce ROI relies upon what you wish to find out about your online retail business and its current state. There is more than one ROI formula for you to compute the state of your eCommerce shop. While this can be interesting, it's great to know whether the campaigns/changes implemented are doing beneficial things for your business.
The basic monetary ROI
The fundamental financial ROI is the least demanding and furthermore the most utilized estimation as it is basic and insightful. You just have to divide the revenue produced by the expenses required to expedite the sales:
ROI = (cash earned – cash spent)/cash spent
Despite the fact that it can provide you with an insight into your business’s performance, with regards to computing your online business ROI, the easiest way isn't generally the most effective. By utilizing this basic strategy you can't recognize the campaigns or channels. However, you can benefit greatly by factoring in customer lifetime value.
The name of this metric can be somewhat unnerving, however, it's quite basic as it estimates the profit earned by your business from any customer.
To begin with, you must assess your information base and identify channels that attracted the highest number of customers. After that, you incorporate the corresponding costs into the equation. Here is the ROI formula for customer lifetime value -
ROI=(Customer Lifetime Value/Expenses of communication channels)/Expenses of communication channels
How to utilize it properly?
Customer lifetime value is extremely beneficial when it comes to quantifying eCommerce ROI, and also helps in the decision-making process of your business. For instance, you can analyze the amount to spend on your future acquisition marketing campaigns, how to tweak your offerings to accommodate client expectations, decide the number of emails required for different customer segments, and so on.
Revamp your strategy with marketing ROI
In order to enhance your existing marketing strategy, you must decide the acquisition expenses and compare them to customer lifetime value. Here is the formula for this one -
Acquisition cost = Acquisition cost/Number of new clients obtained
However, why is it necessary to measure acquisition cost for calculating your eCommerce ROI? Every day, hundreds of new eCommerce businesses are coming up all over the world. As such, it takes time for search engines and clients to crawl and discover your website, before you can start seeing substantial monetary ROI.
This is the justification for focusing on other useful metrics such as marketing ROI. It also helps in understanding that if you can recover your marketing costs right from the start, you have done a highly commendable job.
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