Marketing
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5
 min read

Why is ROI Such an Important Metric?

Companies need to be as data-driven as possible, especially in today's world, where almost everything can be done online and remotely. Many companies have different marketing programs going on simultaneously, from email to social to direct mail. So how do you decide which program did the best, which did not perform well, and which you should do again in the future? ROI is a great way to answer all these questions in a data-backed way.

Companies need to be as data-driven as possible, especially in today's world, where almost everything can be done online and remotely. Many companies have different marketing programs going on simultaneously, from email to social to direct mail. So how do you decide which program did the best, which did not perform well, and which you should do again in the future? ROI is a great way to answer all these questions in a data-backed way.  

What is ROI?

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ROI stands for "return on investment" and is a ratio between the net profit and the investment cost. Companies want to see a high ROI, which means that the investment performed well compared to the cost. It is also essential to measure how efficient an investment is so that your company does not waste time and money on something that does not have a high return. IgnitePOST has a high return on investment since direct mail can help you retain your best customers with the highest lifetime value and keep them happy.

How to Use ROI

It is also crucial to be sure you are using ROI correctly. A common mistake when doing ROI analysis is comparing the initial cost of the investment, which is usually cash, with the return measured as profit. The correct approach is always to compare the initial price to cash flow; in other words, how much is moving in and out of your business over a given period.

What is ROI Analysis?

Using ROI is very important, but it can be a challenging process to analyze. We have broken it into four steps for you:

  1. The first step is to determine how much the initial investment will cost. You may have spent money on it multiple times, and you'll need to add up all the money it cost to complete the investment. For example, if you bought a machine, it wouldn’t be just the machine's price and any shipping costs; maybe you also need to hire a person to operate the machine. If the investment is more like a longer-term project, the investment will be a bit more tricky to measure.
  2. Then, you will need to forecast how much cashflow you predict to make on the investment. This can be hard to estimate since you may need to allow for more time spent or any other variables that may come up along the way.
  3. The next step is to figure out what the minimum rate of return should be on this investment. This also has to do with the risk involved in the investment.
  4. Once the whole process is over, the last step is to evaluate how the investment performed. For the calculation, you can use payback, net present value, and profitability index.

This process will help you evaluate the efficiency of your investments. Learning how to use ROI is a great way to help your business stay on track. It will help you choose your next steps to grow your business.

IgnitePOST Team
Verified writer
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