Return on investment - or ROI - is the rate of revenues received for every dollar invested in an item or activity. In a marketing sense, knowing the ROI of your advertising and marketing campaigns helps you to identify which techniques are most effective in generating income for your business.
Calculating ROI for our purposes is not a difficult process. It is merely the amount of revenues generated divided by the expense. For example, if you spend $1,000 per month for Pay Per Click (PPC) advertising and generate $2,000 in revenues directly from your PPC campaign, your return on investment is actually $2,000 but is more often referred to as a ratio such as $2 or 2 to 1.
The difficulty in calculating ROI lies in how closely specific revenues can be tied into their source. For example, if you engage in a search engine optimization (SEO) campaign, you may not be able to accurately determine how much an increase in your revenues was a direct result of that campaign because you may have had other sources that resulted in increased traffic to your Website or you may not keep accurate records of the actual sales attributed to your Website, and some of your revenues may have come from offline source.
Additionally, because you are dividing by your expense, if you engage in a free promotional activity that results in increased sales, the denominator would be zero, which results in a mathematical error.