Return on Investment (ROI), an indicator and an answer for many questions in a business
When we talk about business and investment we talk about ROI, one of the most important indicators for a business, used for every activity, marketing included
ROI means Return on Investment, this is a financial indicator to understand if and how what we spend for the company, returns as profit.
The Return on Investment can be express as number but it easier to find it as percentage.
Banally if the ROI is positive, our investment is profitable, if not we lost money that we could use for something better.
The Return on Investment is important to monitor the investment, but it is very useful as forecast to evaluate the potential investments and create a ranking to have a clear idea about the opportunity cost for each option on list.
The calculation of ROI is theoretically easy
ROI= (Net Return on Investment/ Cost of Investment) x 100%
But practically it is not so easy, there are to evaluate different points and remember we could have transition cost, taxes, inflation and, especially one the most important variable: the time. Time can change completely the opportunity cost of an option and move a decision from an investment to another one.
There is also an alternative calculation of ROI, used more for financial investments:
ROI= ((Final Value of Investment- Initial Value of Investment)/ Cost of Investment) x 100%
In this post, I want to consider the first formula and try to give some short points of analysis to calculate it.
To analyse the formula, we start with the cost of investment. As cost, we must consider all costs, obviously the money we directly spend, but also the time and all resources used for the investment. We have to always remember that the time is a cost, especially our time, every work has a value, and it must be evaluated.
The Net Return on Investment is another point not always easy to evaluate. We have to take attention at the “net”, this means that we have to remove from revenues all taxes and costs, as cost there is obviously also the cost of investment. To consider the revenues of an investment we have to separate the normal trend if we have in the period with the increasing or decreasing derived from the investment. As example we are already increasing the sales of a 10%, the revenues we must consider are only on top of that percentage.
In some case, in the net return, we can also have a saving of resources in the period with the consequent saving of cost.
As I told before, the time is an important variable, many investments have a result on the short term and another on the medium term, but often this last one is difficult to evaluate. This last scenario happens often with marketing. A promotion or communication has an instant result in term of sales or number of contacts but the evaluation in terms of brand awareness is not a number easy to extract immediately, it need time to be considered.
For this last point, in a marketing campaign, the brand awareness connected with a marketing plan, is often excluded from the calculation of the first ROI so to consider only the short-term results and what is immediate clear with numbers. The brand awareness with its ROI will be normally clear after a period, with the improving of many brand and company indicators.
ROI is one of the most important financial indicators, before to evaluate and decide an investment, and then to create a forecast and have a benchmark for the measurement.
Marketing is strictly connected with Sales and every campaign should have a positive ROI or, at least, null. Obviously, Marketing is not a perfect science, and, in some case, the final result could be negative, this means we have an opportunity to improve. Some single investment can have a negative ROI, but they are normally part of a complex strategy, and the real positive result will be at the end of sequence or with an annualization. If our marketing plan is full of negative ROI we are doing some nice artistic activities but not marketing.
The ROI is essential to decide and predict, to have a clear idea which is the campaign or investment to do and repeat, and which not, and build the strategy for the new year.
Remember: to calculate the ROI and every indicator, we must consider our real profit on products and service, never confuse sales, profit and margin, this error is unfortunately very common.