Operating solely on instinct, your ecommerce venture is posting a profit every month. However, you know you’re going to have to be more scientific about the way you run it to reach the next plateau.
This means you’ll need to decide which things are worth doing—and when to do them—more so than others. A good way to accomplish this is to calculate your return on investment (ROI) for the key aspects of your operations to help you prioritize.
Of course, if you’ve never done this before, you’re probably wondering how.
So, let’s spend a few minutes demystifying ecommerce ROI.
Return on Investment Defined
Simply put, your return on investment is the profit generated in relation to amount of capital you invest. The mathematical formula for calculating this is:
ROI = (Profit – Investment) / Investment X 100
To simplify the math, let’s say your investment is $100 and your earnings are $110. When you subtract the total earnings ($110) from your investment ($100), you get your profit of $10.
Following the formula above, the computation would go as follows:
(10 -100)/100 x 100 = 90/10,000 =.009 =.9 percent
Thus, an investment of $100, which generates $10 in profit, yields an ROI of .9 percent.
Applying this formula to improvements you might pursue such as social media marketing, email marketing, site redesign, optimizing for mobile and advertising can help you decide the order in which upgrading each of these operations should be taken on for your particular business.
(Keep in mind that you can have negative ROI in situations where you invested more than your earned.)
However, before you can upgrade certain operations, you must also determine what percentage of your current profit can be traced to each of those activities. You’ll also need to gauge how much of an increase in profit improving each of those areas could bring.
Let’s say you’re spending 20 percent of your budget on email marketing each month, but only five percent of your traffic is being generated from that effort. Meanwhile, you’re spending another 20 percent of your budget on social media, and 10 percent of your traffic is being generated from those activities.
Clearly, your return on investment is better from social media than email.
But is it really?
Consider the Value of the Customer
You must also take into consideration the value of the customer you get from social media vs. email. How many of the social people actually make purchases? How many of the email shoppers?
In most cases, email customers tend to buy more than those drawn to a site by social media. Thus, the email customer is probably going to be more valuable to your business than the social customer in the long run. Remember, however, repeat business is what keeps most enterprises afloat.
Viewed from that perspective, your ROI is likely to be better with email than social media. Thus, if you have to prioritize, given the numbers, the logical move would be to put additional funds into email marketing first, then add support to social marketing when your budget allows.
Each Situation is Unique
Of course, all of this is theoretical. You’ll have to apply your specific circumstance to these formulas, rather than basing your decision on the examples as they are presented here.
Further, there are other variables to consider.
For example, with email, you’ll want to look at the number of subscribers you have, how often they open your messages, their click-through rate and how many of those clicks convert into sales.
After all, when it comes down to it, what is ecommerce but the buying and selling of goods or services using the internet, and the transfer of money and data to execute these transactions? With that in mind, your goal should always be to place your capital where it will do the most good toward furthering those purposes.
Demystifying ecommerce ROI can help you make the critical decisions regarding the allocation of your operating budget. However, you must also take your specific circumstances, as well as the nature of your ideal customer into consideration.