ROI: Why You're Calculating It Wrong, and How to Fix It

Measuring Return on Investment (ROI) might seem straightforward. Spend money on marketing or advertising, measure the revenue generated from that expenditure, and calculate the ratio. Simple, right?

Measuring ROI is the most basic requirement of analytics and reporting; if you can’t accurately measure the ROI of a marketing activity, you might be making the wrong changes to your campaigns. The implications can be significant yet most businesses are not calculating ROI accurately. 

At its core, ROI is the ratio between the net profit and the cost of the investment, resulting in a percentage that represents the profitability of that investment. The formula is simple:

ROI=(Net Profit/Cost of Investment)×100

However, the components are not as straightforward and it’s these which most businesses get wrong. Most approaches have big holes in both the return and the investment parts of the equation:

Calculating Return

The 'return' in our ROI equation signifies the profit. Yet, the way this is traditionally measured has its plenty of pitfalls. 

Last-click Attribution

Most platforms stick with the last-click model - GA4 have recently removed all other models apart from last-click and DDA. This means if a user interacts with several advertisements or marketing campaigns before finally making a purchase, only the last interaction gets the credit. This approach doesn't provide a holistic view of the customer journey or accurately depict the value of various touchpoints, so the return can be assigned to the wrong activity.

Limited Time-Frame for LTV

Does your platform or calculation consider the 30, 60, 90, 180-day or even full Lifetime Value (LTV) of a customer? Often, the focus is too narrow, not taking into account the longer-term value a customer brings. 

SKU Level Profit Margin Data

Especially relevant for e-commerce and retail businesses, ROI calculations need to go deeper than surface-level revenue. Does your calculation consider the profit margins at the SKU (individual products sold) level? If not, you might be overestimating your returns.

Calculating Investment

When it comes to the investment side of the equation, the gaps are just as problematic.

Biased Lookback Windows

The 30-day attribution lookback window in GA4 is a big problem for ROI accuracy. With such a limited view, the full cost history often remains hidden. If your marketing campaigns were driving paid traffic beyond 30 days, you're missing out on valuable cost data.

Data Retention Periods

By default, GA4 has a 60-day data retention period. This again limits the full view of the multi-touch journey to conversion. Long-term campaigns not only get shortchanged on the revenue side, their costs are missing from the equation.

Cost Scope

By defining the scope of costs too narrowly, you will get a further skewed picture of ROI. Factors like manpower, platform fees, overheads related to campaign management, or even third-party tools used for tracking and optimization should be incorporated. For example, if there are agency management fees on top of click costs, this should be brought into the picture. 

So How Do You Measure ROI Properly?

The truth is, there's no one-size-fits-all approach to ROI. However, by being aware of the shortcomings and ensuring you're considering both the detailed return and the comprehensive investment, you're already ahead of the curve.

• Diversify attribution models and don't rely solely on last-click. Explore models like first-click, linear, and data-driven attribution to get a holistic picture and make sure the platform you're using can capture the full picture of a customer journey.

• Consider the longer-term value of customers and adjust how you consider LTV in a way that makes sense with cash flows.

• Deep dive into your costs, from SKU-level profit margins to indirect costs, make sure every dollar is accounted for and can be assigned to a sale or journey.

• Don't be restricted by default settings. Adjust retention periods where possible, and make sure your analytics platform provides the detailed insights you need.

• Consider a specific attribution solution. As platforms like GA4 regress, removing most models, look to alternatives that are moving forwards.

While ROI might appear straightforward, the devil is in the details. By recognizing the pitfalls and proactively addressing them, you can ensure you’re making data-driven decisions that truly reflect the profitability of investments. It's not just about getting the numbers; it's about getting them right.