Return on Investment, most commonly referred to as ROI, is a term that is used frequently in today’s marketing/business arenas -as well it should be.  Below is a basic breakdown of what all the “terminology” means and the underlying formulas for calculating marketing success.

Generally, the more expensive your product / service, the more you must spend to acquire a new customer.  The cost of lead acquisition equals your marketing cost divided by the number of customer leads that the activity generates.

Cost of Lead Acquisition = Marketing Cost /# of Leads

If you spend $100 for PPC ads on Google to get 20 people to your site, your cost is $100 divided by 20, or $5 per lead.  If only two of those 20 people buy, your cost of customer acquisition is actually $50.  That’s fine if they each spend $250 on our site, but what if they spend only $25?  You can compute acquisition cost for any single marketing campaign or technique for an entire year’s worth of marketing expenditures. 

Break Even Point

The break-even point is the number of sales at which revenues equal total costs.  After you reach breakeven, sales sy76tart to contribute to profits.  To calculate the break-even point for your web site, subtract your cost of goods (or cost of delivering services) from your revenues, which yields the gross margin: 

Revenues – cost of goods = gross margin

Now total the fixed costs (charges that are the same each month regardless of how much business you do) for your web site, such as monthly developer’s fees, hosting, charges for your ISP, overhead and in-house labor.  Finally, divide your fixed costs by your gross margin. That tells you how many sales you must make to pay for your basic web expenses. 

Fixed costs + gross margin = break-even point

Costs of sales are expenses that vary with the amount sold, such as shipping and handling, commissions, or credit card fees.  For more accuracy, you can subtract these from your revenues as well.  Divide the results into your fixed costs to get the break-even point. 

Figuring out whether you’ll make money online

Return on investment (ROI) looks at the rate at which you recover your investment in site development or marketing.  Often you calculate ROI for a period of a year.  To calculate ROI, simply divide the profits (not revenue) by the amount of money invested to get a percentage rate of return: 

Profits + investment = rate of return

You can also express ROI by how long it will take to earn back your investment.  An annual 50% ROI means it will take two years to recover your investment.  As with acquisition costs, you can compute ROI for your original investment in site development, for any single marketing campaign or technique, or across an entire years worth of Web expenses. 

Remember:  Don’t spend more on marketing then you can make back.  Losing money on every sale is not a good business plan. =}