A term that is tossed around a lot in business is ROI and ROI calculations. ROI stands for return on investment ROI is one of the best metrics to evaluate the power of different investments and the worth of different strategies. It weighs your initial cost, your initial investment, against your net income.
You can measure your company’s ROI by understanding the value of what you put in and what you bring in as a result. It’s a percentage that you can use to see your campaign’s effectiveness.
How Is ROI Important?
Return on Investment (ROI), is one of the most important acronyms for an entrepreneur and businessman. We always want to know what we will get in return for our investment, be it time, resources or money. If we can’t determine if the return is worth it, we usually won’t put money into the item or service.
But ROI can be tricky to measure. There are certainly many ways to consider return on investment, but two factors are extremely important when considering what “kind” of return you are actually getting: quantitative returns or qualitative returns.
These are money, new customers, leads, etc. With quantitative returns, a business can see exactly what you receive from your investment, and you can measure it. In this case, there are hard figures with a trail to follow and calculate, like maintenance costs versus amount of sales.
These are a bit harder to measure and include things like employee satisfaction, customer awareness, and brand recognition, to name a few. When considering the amount that was of a particular investment and demand on those invested dollars, there is plenty to spend your money on, and plenty of areas that can yield qualitative returns.
This includes vehicles for the company, equipment, the next awesome employee, software, tools, marketing, buildings, etc. The list goes on, but in this case, the cash doesn’t (unless you are Bill Gates). Here are a couple of brief examples of what the above-mentioned returns look like.
Warehouse Management Software
Let’s say you invest $1,000 in a particular warehouse management software.
- The quantitative results will be challenging to measure but may include hours saved per employee, or the warehouse team increasing efficiency in on-time deliveries to customers.
- Qualitative results may include “happy customers,” more efficient employees, meaning more energy spent doing more productive tasks, avoiding overtime, and ultimately increasing overall satisfaction with their jobs.
Let’s say you invest $1,000 dollars into marketing.
- Quantitatively, you receive $2,000 in sales. This is a 200% return on Ad Spend or 100% ROI, but you just cover product costs in the first month by doing this. You barely break even.
- Your qualitative returns a signal that you have higher brand recognition.
Let’s say you have to find an accountant to take care of your books. You hire him, and things go great.
- Quantitatively you have no easily calculable return.
- Qualitatively you feel you got a great return. Your books are clean and up to date, you have better data, and you can make better, more informed decisions.
Which Is Best For Your Company?
In this last case, your qualitative returns outweigh your quantitative returns. While we would love to have Return on Investment be easily quantifiable, it takes more thought than just the investment of one dollar and a return of two dollars. We have to actually examine the value of what investments bring as far as assets, increased effectiveness, more access to investors, or general quality.
As a business owner, seeing profit immediately is nice, but it won’t overshadow the profitability of a calculated, qualitative return on investment, which can lead to a higher final value and overall ROI. Because of this, it’s better to have both types so that you can see multiple types of investment returns.
Check Your Calculation
Your investment ROI can be different depending on what factors you use as a performance measure. The profit your company is seeing is a moving target, so you have to know what you want to track. This can include understanding your target market, examining your marketing campaigns, and focusing on where profits are being seen or missed.
Understanding this will help you calculate return of investment. Especially as the present value of things can change, it’s good to routinely check and update your plan in beneficial ways to keep a higher ROI. There may be quantitative and qualitative that take you far beyond just the two points.
Consider this as you invest your hard-earned dollars. Your return doesn’t come easy unless you put risk and growth in the right places. Ultimately as executives or stewards over these types of decisions, we simply want to make sure we are making the best-informed decisions. Understanding ROI and ROI calculations gets you the next step there.
Arcane Marketing is one of the best areas that can help factor all the quantitative and qualitative data to get you the best strategy. We take pride in working with businesses and making ROI improve. If you want help making sure investments are used properly, understanding ROI calculation, and increasing your company’s net present value, reach out for a consultation.