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How To Calculate ROI For Your E-commerce Business

A mobile phone with a shopping bag and a shopping bag.

In any business growth, marketing is crucial to draw customers' attention.

Deciding on a business with consideration of the outcome of it is a good use of time. Nowadays, calculating Return On Investment for business is more important than revenue. When ROI is high, the company pays off; marketing strategies must be edited if it is low. ROI helps in understanding the efficiency of marketing and sales efforts. For a business man Return on business investment is an important parameter to measure its business productivity and performance.

What is ROI in the e-commerce business?

The term ROI in e-commerce business refers to the outcome of any marketing campaign or channel you initiated to increase profitability. It compares how much profit you gain from a step taken for business growth. 

  • Return on investment compares how much money you spend on initiative and how much you earn from it
  • It can be positive or negative
  • Positive ROI means it is a profit
  • Negative ROI means you spent on the campaign more than you earned from it

Parameters for finding ROI in E-commerce

The two basic formulas are used in finding Return On Investment (ROI). One is applied for a solid overview, and the other deals with long-term client relationships and purchases. Let's look step by step at how these formulas are helping business people find out their Return on investment. 

1. Basic ROI calculation 

The simple formula to check marketing campaign performance

ROI= (Profit/investement )*100

Example

You have been promoting a new product for the last month. You spend $500 on Facebook ads and $2500 on blog posts. The ad campaign generated 5 new customers, and organic traffic led to 50 new customers. Assume the average order value is $75 for all customers. 

Separately finding ROI for each campaign

Facebook ads

profit= final value – investment 

For 5 customers of order $75 final value= 375

profit= 375-500 = 125

ROI= (125/500 )*100 = -25%

Blog posts

profit= final value – investment 

For 50 customer of order $75 final value= 3750

profit= 3750-2500 = 1250

ROI= (1250/2500 )*100 = 50%

Result

From the above hypothetical example, Facebook ads are not worth spending money on. But blog posts and organic search could produce customers. 

2. Advance eCommerce ROI

In the advanced ROI formula, the total customer relationship value is included in the formula. It represents revenue generation over time-based on something other than the customer's first purchase as simple ROI is based. 

Formula

ROI = (CLV/ investment ) * 100

Here are the formulas to use:

AOV(average order value)= total revenue/ total number of orders

Purchase frequency= total number of orders/ total number of customers

CLV= AOV * purchase frequency

Sources of Ecommerce ROI metrics

Some tools and dashboards are required to measure the CLV of a store. You can find your customer purchasing pattern and revenue from the following platforms

Dashboard

When you open a shop or page on any big e-commerce store like Shopify, Amazon, Big Commerce, etc., they provide a dashboard page where detailed data of customers is displayed. Over time, you can see from which region you have the highest purchases. How many orders have been placed? You can create custom reports from this data. 

Website analytics

Google analytic apps allow its users to collect many standard e-commerce metrics automatically. You can access the Google Analytics admin panel to enable e-commerce tracking and reporting. You can view many transactions, revenue amounts, and conversion rates from each channel's acquisition tab and overview.

Conclusion

Indirectly, e-commerce return on investment can be increased by investing more in platforms, which could result in long-term customer relations. Write compelling content that drives people's attention to a website. Write attractive and precise product descriptions and market them on multimedia platforms. Write informational blogs on your product, targeting keywords that bring your store traffic. In this way, you can improve your ROI value in businesses.

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