The metric shows what you gain out of your marketing investment—whether it's profitable or not.
It's calculated through the following formula:
ROI = (Profit – Investment) / Investment x 100 When using the metric, it's necessary to take into account not only the instant profit but long-term benefits as well:
Your investments are: $5000 in organic traffic, and $500 in a paid ad.
Number of clients acquired: 30 through organic traffic and 10 through a paid ad.
Average checkout amount for both: $150
Therefore, ROI out of organic traffic:
(30 Х 150) — 5000) / 5000 Х 100 = — 10%
ROI out of a paid ad:
(10 Х 150) — 500) / 500 Х 100 = 200%
The metric shows that a paid ad result in a better profit.
However, ROI should always be calculated considering another metric—
Customer Lifetime Value.
Customer Lifetime Value—total amount of sales that a client has generated over time.
The way Customer Lifetime Value is affecting ROI results is
the difference in the quality of traffic that organic traffic and a paid ad brings. Online customers that came through organic traffic are of much better quality and are more loyal, therefore, the probability is high in such a way that they are the ones who make repeat purchases.
Thus, Customer Lifetime Value metric can bring the following data to the equation:
Average Customer Lifetime Value for clients from organic traffic: $10,000.Average Customer Lifetime Value for clients from paid ads: $600.
In this case, you take into account the long-term profit as well, and ROI is the following:
ROI out of organic traffic:
(10.000 — 5000) / 5000 Х 100 = 100%
ROI out of a paid ad:
(1500 — 500) / 500 Х 100 = 200%
Calculating ROI in this way will lead to a clearer picture in terms of the long-term profit that you get.