Return on Investment (ROI) is the amount of money received by an investor from a business venture. The venture could be an investment in real estate, stocks, or a startup. In the eCommerce arena, the net profit represents a return on investment as well as the efficiency of investing in a particular business. As an online entrepreneur, the ROI is one of the crucial business concepts to master.
Herein, we’ll give you a bird’s-eye view of the ROI, how to calculate it, its uses, and how to improve your business ROI.
How to calculate ROI?
Return on investment tends to be expressed both as a ratio and percentage. However, for easier understanding, we’ll mostly go with the ‘percentage’.
The profits or losses from your investment can be expressed in terms of the percentage of the invested capital. This is the whole concept behind a ROI.
To calculate ROI, you’re required to subtract the ‘initial investment cost’ from the ‘total returns’ from that venture, then divide the result by the ‘initial investment cost’.
The formula for ROI is: (profit – investment) / investment x 100
Consider this simplified example:
Total amount invested in a wholesale business – $10,000
Total Revenue at the end of the year – $15,000
Return on Investment: (15,000 – 10,000)/10,000 = 50%
Therefore, such a business is said to have an ROI of 50% meaning, for every $10 invested, you should receive a return of $5 each year.
But perhaps you might be asking yourself: what is a good ROI?
There’s really no fixed answer to this question. When it comes to ROI, things such as time also come into play, apart from the invested capital and annual returns. A business with a return of 10% per year might be contented its rate of return compared to an ROI of 30% calculated over a period of say, five years. The most important thing is to analyze your ROI duration while comparing it to the other industry players.
That notwithstanding, most B2B companies prefer analyzing their respective ROIs separately. An example is a marketing ROI. An ideal marketing ROI for an eCommerce would be an upward of 1:5 translating to 500%. This means that for every dollar spent on marketing activities, gains worth about five dollars ought to be realized. An example would be leads generated from Facebook Ads compared to the amount paid for the advertisement.
In the world of stocks, veteran Wall Street investors such as Warren Buffet generally consider an average ROI of at least 10% to be acceptable. Again, the ROI can be a highly subjective figure that deserves a more detailed analysis to establish your specific ideal percentage.
And if you’re getting a low ROI, don’t panic – later in this article, we’ll be sharing some three time-tested tips for boosting the ROI of your eCommerce business. For now, let’s run through some prime uses of ROI.
Uses of ROI
Once established, the ROI percentage has multiple uses both for the business and investors. A potential investor relies on an ROI to determine whether or not a venture is worth their capital. By comparing the ROI of wholesale and retail businesses, they can determine where their money will get better returns.
Similarly, a B2B firm uses ROI to woe potential investors. By demonstrating that the business can generate money, store owners can get a capital boost from the market to augment their operations. Internally, a business owner uses the ROI to determine how efficiently a business is using up capital, and institute corrective measures in case the rate falls below the set target.
The opposite is also a reality that businesses must face. If the ROI is low, it means the company is not efficient enough to bring forth sustainable profits. That will also mean that potential investors might be hard to come by.
How to boost your online shop’s ROI
Now that you know what return on investment is and how to calculate it, we’ve come to the next important step: how to improve this business metric for better returns on capital. At Turis, we like to see you get the most of your efforts, which is why we trust that the below tips will positively impact your ROI if applied consistently.
Tip #1. Consider adding social proof
The fastest way to earn your customers’ trust is by adding genuine reviews and testimonials to your pages. Always try to ask for reviews from your customers not just for the world to see but to help you know your areas of strength and weakness for future improvements. Research shows that at least 93% of shoppers rely on online reviews (Brightlocal, 2019). In 2020, Trust Pilot also established that nearly 90% of consumers read reviews before making a purchase. These stats show you the essence of reviews and testimonials from your clients and how they can boost your revenues and subsequently your ROI.
Tip #2. Minimize cart abandonment
You may have the best wholesale eCommerce website with fluid navigation but if the checkout section is off, you might end up losing money due to abandoned carts. A study by Wikipedia found that cart abandonment on online shops averages 67.91% with the figure steadily rising among mobile phone users. Some of the reasons for this include:
- Lengthy registration processes
- Exorbitant shipping costs
- Insufficient payment methods
- Inquiring too much info from the customer, and more.
Fixing these issues will help reduce the abandoned sales thus increasing your income. Strive to make your website intuitive so that customers spend less time trying to close a sale but more time shopping.
Tip #3. Find the right eCommerce tool
The “right” tool here doesn’t necessarily mean the most popular or cheapest. And NO, neither does it mean the fanciest. It means understanding the needs of your customers and merging them with your business objectives. For example, as a wholesaler, you want to partner with an eCommerce tool that’s customized for your nature of business – B2B transacting. A tool such as Turis was specifically made with a small to large wholesale business in mind. And with it, you won’t have to miss out on the other equally useful platforms for marketing, and bookkeeping since it features more than 2,000 integrations. Furthermore, the software’s built-in analytics functionalities will help you monitor your ROI plus a ton of other useful business metrics.
Well, there you go. We hope this helps you understand the ROI concept and why it’s important in the eCommerce space.
Still got a question about any of these? Shoot us a direct message and we’ll be sure to revert in no time!