How to calculate ROI in e-commerce?

Are you aware of the fact that if you do not adequately analyse the indicators for your online shop, you may lose not only money but also customers? These issues are particularly important nowadays when the competition is growing, and customers' needs and expectations are becoming increasingly exorbitant. The solution to this problem is to monitor the ROI, Return on Investment, continually.

 

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What is the return on investment in e-commerce?

ROI (Return on Investment) is a way of measuring the financial returns obtained from a specific investment against the costs incurred. In its basic version, it can be calculated using a formula:

ROI 1 EN

For example, it will be very useful for measuring the effects of advertising campaigns. If we spend EUR 1000 on the promotion of our e-shop and thanks to that we sell 8 products for EUR 200, then the ROI will amount to:

ROI 2 EN

ROI = 60%

So, we can see that the promotional campaign was effective ‒ the higher the ROI value, the lower the cost of acquiring a client. Conversely, if ROI is at a low level, it is known that the expenses incurred exceeded the profits. 

Of course, calculating the ROI for e-commerce depends primarily on what we want to know about the condition of our online shop, and the simplest way to measure it is not always the most accurate. Based on the ROI alone, we are not able to identify the channels or campaigns that have attracted customers to our online shop. This lack of information is crucial, as there are very large differences between customers. It is very important to identify and analyse the buying habits of your best customers (usually no more than 1%) spending 30 times more than your average customer. Then, you will be able to adapt your sales strategy to their expectations. However, you cannot achieve this without comparing the ROI with other essential indicators in e-commerce, for example, with CAC (Customer Acquisition Cost) or LTV (Customer Lifetime Value).

How to improve the ROI of an online shop?

Now you know how to calculate the ROI correctly, we have reached the next important step ‒ the point where we will consider how to improve this indicator. What factors affect the return on investment?

1. Buyer persona – get to know your customers

The basis for all marketing activities is to define the target group of your online shop precisely. If you don't know exactly who you are addressing your content and promotion strategies to, your sales messages will probably be too general. Therefore, the better you get to know your audience's needs, the better you will match your offer, channels of communication, as well as its tone and form to their preferences. Research by AgilOne shows that 70% of online shoppers expect an individual approach. This should not be forgotten.

2. Get traffic on your website

You will also not achieve the expected profits if your online shop is not visible in search engines. What is more, you must try to encourage only those customers who will be interested in placing an order to visit your site. Then the return on investment will be at a satisfactory level.

When attracting traffic through SEO, the first thing you need to do is to find out which keywords are important for your industry. In this case, as we are talking about ROI, the ideal solution would be to focus on these two types of keywords:

  • Sales keywords – those that show the purchasing intention of users. For example, “buy an iPhon” or “cheap SLR cameras”.
  • Product keywords – they describe the products you have on offer. For example, “Apple iPhone 11 Pro” or “XIAOMI webcam”.

By using the right keywords in your brand communication, you increase the probability of finding your offer online for users interested in purchasing and thus increase the return on investment.

3. Segment users in advertising campaigns

If your strategy for attracting new customers and generating sales is based on advertising, be very careful to segment your campaigns. For this reason, we very often hear about the conversion power of Facebook and Google Ads, which offer many options for audience segmentation. 

Before you allocate your budget to paid advertising campaigns, think carefully about what message and in what form it will be valuable to particular audiences. Set these data with the purchase stages of your customers and only then create your campaigns. Then you can be sure that the money invested will bring you maximum profit.

4. Take care of your shop's UX

The return on investment is also affected by the proper preparation of the online shop. Users do not need to know what technology it is made of or how many advanced features you have implemented in it. Users are interested in meeting their needs. They are just looking for a product or service and want to purchase it in the simplest possible way. This is what UX helps them to do. 

So make sure the e-consumer is guided intuitively, for example, from search engine advertising directly to the product card. Show the final price, clearly specify the shipping costs, take care of the photos and a reliable description. Also use testimonials, i.e. opinions of other customers to increase the credibility of your brand. UX allows you to boost ROI because people who want to buy a product will always choose the online shop that meets their needs. If you know this, you are one step ahead of your competitors. 

Remember that not verifying ROI is like walking in the desert without a compass. You cannot know which path to follow because you have no point of reference.