Successful ecommerce companies constantly track essential KPIs and optimize their business accordingly. One of the most important metrics to follow is ROI, or return on investment. Assessing the return-on-investment metric helps understand which efforts give the best business outcomes.
This article explains why ecommerce ROI is important, how to calculate it, and which strategies help increase it.
What Is Ecommerce ROI?
Ecommerce ROI is a financial and marketing metric that measures the expected profitability of an online marketing campaign, channel, or investment. It shows the ratio between the profit from a marketing campaign and the invested amount, and is usually expressed as a percentage.
A negative figure means that the expenses exceed gains, and a positive ROI means that the profit exceeds the initial investment cost.
Why Is Ecommerce ROI Important?
ROI is essential in determining an ecommerce business’s profitability and the effectiveness of its marketing efforts. It helps identify which projects and channels are bringing in revenue and which are ineffective and wasting money. Understanding ROIs across all marketing channels helps determine where to reallocate funds from projects that do not generate revenue and how to scale top-performing campaigns.
Positive ROI also helps attract shareholders and investors, securing funds for future growth.
How to Calculate Ecommerce ROI
ROI needs to be tracked on a regular basis. The following steps outline the process.
- Determine whether to calculate an overall ecommerce ROI or ROI for separate marketing channels.
- Find the data you need for the calculation, such as the number of customers, the customer lifetime value, acquisition channels, etc. Most businesses retrieve these metrics from their financial statements, ecommerce platform dashboards, Google Analytics, Google Ads, Facebook Ads Manager, and other website analytics.
- Use an appropriate formula – basic, annualized, or advanced.
Basic Ecommerce ROI Calculation
The basic formula is simple, requires little data, and gives an approximate ROI value.
ROI = (net profit – investment cost) / investment cost
The value you get is a ratio. Multiply it with 100 to turn the ratio into a percentage, which is easier to understand and compare with other business unit’s ROIs.
Example:
A company invested $500 in an email campaign to promote a new product priced at $50. They also spent $1,000 on website content to boost organic traffic to their ecommerce shop.
At the end of the month, the company sold the product to 15 customers from the email campaign and to 5 organic site visitors.
The calculation shows that the ROI for the email campaign is 50% and -75% for the organic channel. The numbers indicate that the email campaign is effective, while the organic traffic channel is underperforming.
When calculating ROI, keep in mind that different campaigns and channels scale differently over the same period. Email marketing typically returns a burst of high ROI while content marketing takes time to pay off but brings long-term benefits.
Annualized Ecommerce ROI Calculation
In some cases, businesses use the annualized ROI formula to factor in the period during which a company holds the investment and accrues the ROI.
Annualized ROI = [(1+ROI) ^ (1 / n) – 1
Multiply the value with 100 to get a percentage.
The variable n in the calculation is the number of years during which the investment is held.
Example:
A company invested $10,000 in video marketing to promote their new products on YouTube and generated $50,000 in sales over five years. The overall ROI, according to the basic formula, is 400%. However, the annualized ROI formula factors in the amount of time it took to convert viewers into customers and shows that the campaign’s ROI is 38%.
Advanced Ecommerce ROI Calculation
Another limitation of the basic formula is that it gives ROI based on customers’ one-time purchases. The goal of most ecommerce businesses is to have return customers, generating more sales from each buyer over time.
The advanced ecommerce ROI calculation solves this limitation by factoring in the customer lifetime value (CLV). It is the amount a company expects to earn from a customer during their relationship with the company.
This formula requires more ecommerce KPIs and you first need to establish the following values:
- Average order value = Revenue / Number of orders
- Customer Lifetime Value = Average Order Value x Number of Transactions x Retention Period
Now you can calculate the advanced ecommerce ROI using this formula:
ROI = (CLV – investment cost) / investment cost
Multiply the amount with 100 to turn the ratio into a percentage.
Example:
A company invests $300 in a Facebook ads campaign and sells 20 products worth $10 via this channel. The basic calculation shows that the ROI for the campaign is -33%. However, the company’s CLV for Facebook ads is $450. When this metric is factored in, the return on investment becomes 50%.
What Is a Good Ecommerce ROI?
A good ecommerce ROI depends on factors such as the company size, industry, and analyzed channel (e.g., paid ads, organic traffic, social media, etc.). The higher the percentage or ratio, the better.
Businesses use different strategies to evaluate their ROI:
- Compare overall ecommerce ROI at regular intervals (e.g., weekly, monthly, quarterly, etc.).
- Compare it to a competitor’s ROI.
- Compare ecommerce ROI to the industry’s average.
- Break down the investment into separate parts and evaluate the ROI for each segment.
Different industries have varying ROI averages and standards for what is considered profitable. For example, stocks and real estate businesses have the highest ROI (an average of 10%) but also the highest business risk. Companies that want to avoid risk often settle for a lower ROI.
Ecommerce ROI figures are much higher and not comparable to offline business ROIs. Successful pay-per-click campaigns yield a 25-50% return on investment, while the average ROIs for SEO marketing campaigns reach 275%.
Assess your marketing channel’s ROI on a regular basis – at least once a month. If it shows a constant increase, scale the campaign, or try to replicate it in a new channel.
If the ROI is continually low, reallocate the investment to other campaigns.
How to Increase Ecommerce ROI
Successful businesses use multiple strategies to increase their ecommerce ROI.
1. Use Accurate Data
The accuracy of your ecommerce ROI depends on the quality of data used for the calculation.
Track the right metrics in your ecommerce dashboard and financial statements and set up web analytics to retrieve relevant information about sales. Tag ads and campaigns to track indirect sales. Ensure all costs related to the investment are included in the calculation.
2. Optimize Your Ecommerce Shop
Audit your ecommerce website to discover potential problems that prevent higher traffic and conversions. Ensure pages are mobile-friendly, load quickly, and have clear messaging. Think of ways to deliver more value to users, including detailed product information, quality photos, user testimonials, and exclusive discounts.
Note: Read up on how to boost conversion rates in our article 24 Ecommerce Conversion Rate Optimization Tips.
3. Provide Useful Content
Use keyword and content research tools to discover keywords that can drive potential customers to your website and create content that solves their pain points. Track how the content performs and tweak it until it starts generating more traffic.
4. Create a Smooth Sales Funnel
Guide potential customers from brand awareness to purchase by using multiple marketing campaigns, from newsletters and social media ads to detailed product guides and landing pages.
Organize giveaways and promotional activities on social media to create more brand visibility.
Use remarketing strategies to lead users who have shown interest in your product or brand and ensure your messaging across different marketing and sales channels is consistent and engaging.
Note: For more ideas on how to boost your sales, refer to our article How to Increase Ecommerce Sales in 2022 {20 Methods}.
5. Create a Deeper Connection with Customers
Focus on creating a better relationship with existing and potential customers. Encourage more conversation with users on social media, share user-generated content, organize contests, and look for other ways to increase customer loyalty.
Make customers feel like you know them through personalization. The effort to understand your customers’ preferences will result in growing loyalty and an increase in order size and value.
Note: Learn how to reward loyal customers in our guide Best Customer Loyalty Programs to Use for an Online Shop.
6. Experiment with Channels and Campaigns
Always explore new promotional strategies to increase traffic and sales. Test new channels and campaigns to find out what works and pause the investment in campaigns that consistently show poor results.
If new customer acquisition costs are too high, invest more in creating and nurturing repeat customers. Increasing customer lifetime value helps boost ROI.
Combine paid marketing with organic efforts to expand your reach and find the best strategies for minimizing acquisition costs and increasing revenue.
Note: Learn how to boost your sales with the right ecommerce marketing strategies.
Conclusion
Ecommerce ROI is an essential indicator of the health of a business. Understanding what to do with this metric is key to increasing revenue opportunities. Learn how to measure ROI and interpret the results to make smarter financial decisions.