What is ROI, what are the ways of calculating the return on investment, how to track the rate of return, and what other indicators are available that help in assessing the commercial success of an investment project, says Vera Karpova, analyst at devtodev.
When we make any purchases, we want to get a useful result from them as soon as possible. Having bought a car, we start to go to work comfortably, with the new PlayStation we get pleasure from our favorite game, paying the fitness instructor, we expect to get a fit body, and having paid for dinner, we have fun on Friday evening with friends.
Likewise, investing money in a project, the investor wants to benefit from this investment (only in money terms), and, preferably, as soon as possible.
An indicator of how return the invested money is the ROI – Return On Investment metric.
There are several options for calculating this indicator. The first looks like this:
ROI = (Revenue – Investments) / Investments
In this case, if ROI> 0, then we can assume that the investment invested has paid off.
The second way is a bit simpler – devide the income from the investment by the amount of investments.
ROI = Revenue / Investment * 100%
With this calculation, the ratio ROI> 100% will indicate the payback.
No less important issue, after the fact of payback, is its time – after what time will the invested funds return. Therefore, to monitor the process and the rate of return on investment, ROI can be tracked already in the first week and count it on the 7th, 14th, 30th, 60th, 90th and other days.
At the moment when the income is equal to the amount of investments and the ROI will be 0 or 100% (depending on the method of calculation), they can be considered paid off. And all the subsequent income, which will bring the project, will go only in plus.
Knowing the ROI values on certain days, you can not only track how the funds are returned, but also compare the return on investment in various projects.
Consider this for an example.
Let’s say we have 2 projects: the first invested $ 500, the second $ 1000. Now let’s see how the money spent is returned, using the second formula:
Despite the fact that the second project brings more money, the first one pays off faster.
It is this calculation of ROI – on certain days – and allows you to compare different projects, even if the investments were made not simultaneously. If we consider only the final ROI, then we can erroneously compare its indicator for a project that “lived” 30 days with the one that is on the market for six months.
A particular case of ROI is a measure like ROMI – return on marketing investment. In fact, this is the same indicator that simply emphasizes that ROI can be used in relation to marketing campaigns, along with other areas.
A fairly frequent use of ROI in marketing is to analyze the return on investment in traffic. In this case, the formula can be slightly modified and counted as LTV (Lifetime value) minus CPI (cost per install) divided by CPI, that is, the income that the user brings for his entire “life” in the project, reduced by the cost of attracting this user , Is divided by the cost of attraction:
ROI = (LTV-CPI) / CPI
Or the second variant of the formula:
ROI = LTV / CPI * 100%
In this case, you can calculate the ROI on a certain day from the moment the user installs the application, only instead of LTV, in this calculation, use a cumulative ARPU for the desired day.
ROI N day = (Cumulative ARPU N day – CPI) / CPI
ROI N day = Cumulative ARPU N day / CPI * 100%
When analyzing traffic, do not stop at just one ROI, because in addition to the above metrics, you can get even more information about the user – from ARPU to its behavioral characteristics, which will also help to assess how much traffic quality and target accuracy, for example:
ARPU, conversion to registration or purchase;
The number of sessions that one user makes;
Retention, which can be evaluated already in the first days of installation;
The performance of certain events;
All this will help to better understand what kind of people come into the project from a particular channel.
A small example in which, in contrast to the first, we take into account a few more indicators. Let’s say that we again have two projects with these parameters:
Using this data, you can calculate not only ROI, but also ARPU – an indicator that takes into account paying and non-paying users, and the amount of payments – after which the second project looks even more profitable, as it quickly pays for the investments and attracts users who The average pay more.
There are two more indicators that will help evaluate the success of the investment project – it’s NPV (net present value – net present value) and IRR (internal rate of return). Let’s take a closer look at them.
Articles in this series:
- Performance Indicators: ARPU
- Performance Indicators: ARPPU
- Performance Indicators: Cumulative ARPU
- Games performance indicators: paying users
- Performance indicators of games: paying conversion
- Performance Indicators: ROI
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