Understand what it means to have a negative ROI – WAU
Negative ROI is the indicator that shows how much money the company is losing in each investment made. The term ROI in English means “Return Over Investment”, translated into London as “Return on investment”.
If you don’t know what negative ROI means, read this text to understand everything about this indicator and how to deal with it!
To understand what it means to have a negative ROI, the first step is to understand what the ROI means, that is, the “return on investment”.
ROI is a rate of return that identifies the amount of profit that your company makes through investments made in a certain period of time, calculated as a percentage.
These investments include everything that is done with a view to future profit, such as new marketing campaigns or training for the sales team.
Calculating ROI will help your company identify which strategies are delivering results and are able to bring the business closer to its goals, as well as understand the performance of marketing campaigns and the effectiveness of each communication channel.
How to calculate ROI?
The simplest way to calculate ROI is as follows:
To carry out the account, just identify the revenue and cost data for a given strategy and investment and fill in the formula above, so that it is possible to evaluate its performance.
From this calculation, it is possible to evaluate the return on each investment to be analyzed. The final result can vary a lot, since it can be a negative or positive percentage. Once the result is positive, it means that a certain investment is bringing a return, that is, profit for your company.
As an example, once the revenue from a customer acquisition strategy is 100 reais and the cost is 20, ROI has a result of 400%. From this, it is possible to conclude that for every 1 real invested in this strategy, the company is earning 4 real.
In the case of a negative ROI result, the percentage is below zero and this means that this investment is making the company lose money.
What are the causes of a negative ROI?
As previously mentioned, negative ROI is an indicator that the investment has lost money, that is, the company has not made a profit on the investment made.
In this case, it is necessary to analyze all the strategies and processes of this investment to know what’s working and what’s getting in the way.
From this analysis it will be possible to identify which points should undergo changes, to make good results possible. But, there are some common reasons why your company’s ROI or strategy is negative.
One of the causes for negative ROI is the need for very high investment for a project to be viable. Here, it is necessary to assess what are the costs that make up this strategy and how they can be reduced.
This analysis includes investments such as the choice of paid media to publicize a marketing campaign, a paid platform for hosting your company, the cost of analysis tools for this strategy and even the cost of physical facilities or equipment if they are used in project to be analyzed.
In the case of analysis tools, for example, it may be necessary to use free tools until the investment reaches the expected returns in a certain period of time.
Another example is the high employee turnover in your company, which can impact the increase in costs of a strategy by increasing investments in the professionals involved, given the value of each one from the moment of hiring or termination.
As investment costs have a major impact on ROI, in the case of a negative result, it is appropriate to reevaluate them. After an initial analysis of your results, you can modify the amount invested and contribute to an increase in ROI.
Another important cause for the negative ROI of a strategy is the high risk of a project and investment, a scenario that can occur when there is no accurate forecast and analysis of data consistent with the objectives of the strategy.
It is necessary to consider the risks related to the launch of a product, marketing campaign or other commercial investment. When risks are studied and taken into account before the project is executed, the return on investment will help you choose more coherent strategies and predict problems that can generate excessive costs.
Decrease in revenue
The entire amount collected from the project or investment must be considered as revenue. For that to happen, there are some scenarios such as the economic crisis or the company’s low performance can cause the revenue of a project to decrease.
In the case of the economic crisis, the decrease in revenue happens because many times this situation also reduces the purchasing power of consumers, which can impact the generation of revenue of your company.
Regarding the company’s low performance, it may happen due to internal processes or individual performances that will impact the progress of its strategy.
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How to avoid negative ROI?
Now that you know what are the possible causes of negative ROI, it is important to understand how you can avoid this outcome. So, check out the 3 tips below.
1. Pay attention to your market
It is very important to always keep up to date on new trends and techniques for working on advertising strategies and campaigns. This includes paying attention to the behavior and needs of your audience and the constant changes that can happen.
So it is essential to have a well-developed persona to understand what your ideal customers are like.
Furthermore, it is essential keep up with what the competition is doing. This can be a factor that can turn your negative ROI into a positive one. Analyzing the competition also means capturing ideas to improve them and make innovation within your market.
2. Analyze the results of your strategy
When putting a strategy on the air it is important to define what are the metrics and KPI’s to accompany the process. In addition, the online environment allows you to follow in real time the performance of your actions through complete reports and relevant and updated data.
Thus, one of the measures to prevent negative ROI is to analyze all information relevant to your strategy. This is important for you to discover possible flaws and points for improvement in order to optimize your campaigns and get more out of your investment.
3. Evaluate investments well
The marketing strategies have been adapting and changing all the time, but it is important not to forget that whatever it is, it is necessary to set aside time for the expected results to appear.
So, when calculating your ROI, the best thing to do is to wait for a while for the campaigns to return and you can evaluate a significant amount of data. Otherwise, you can waste a strategy or campaign that would work by making changes and taking it out of the air ahead of time.
Undoubtedly, these are some of the actions that will help you to prevent and even review your negative ROI.
Now you know that ROI has a profound impact on your company’s health and the importance of keeping it positive. So, use what you’ve learned as a starting point to improve your company’s strategies and campaigns and increase your profits.
Learn more about this indicator and how to apply it to your content marketing strategy through this guide on ROI for corporate blogs.