Return on investment (ROI) is a way to assess the payback from your investment of time and money in a given project. It may sound simple, but many businesses overlook this basic evaluation and as a result miss out on the chance to determine the best way to allocate precious company resources.
In small companies where resources are very limited, ROI calculations are particularly important.
Calculating ROI is surprisingly easy. We’ve developed this worksheet to get you started; you’ll learn the kind of insights that ROI calculations provide and how to apply this analysis to improve the way you spend your time and money.
Here is how your company can determine which marketing campaign can net you the most customers.
Example 1: Let’s say a Facebook campaign brings 12 new customers to your business. Your total investment includes the cost of the hours you and your team spent devising the campaign, the cost of creating a short video and capturing photos of your items to post on Facebook, and the cost of the time invested in posting and responding to customer queries.
You would calculate ROI the following way for this project.
Revenue = 12 customers x average revenue per customer @ $420 = $5,040
Investment = $350 in total team time, $750 in production fees for photos and video. Total investment is $1,100.
Return = Revenue – Investment [$5,040 – $1,100 = $3,940]
ROI = Return ÷ Investment [$3,940 ÷ $1,100 = 3.58]. In other words, every dollar you invested in the project returned $3.58 — or a 358 percent return on your investment (ROI).
Example 2: You’ve determined that your website is simply not bringing in enough sales, so you decide to redesign it and promote it through paid search. There are three major expenses: your time, which you calculate to cost $1,500; the site redesign, for which the Web developer charges $3,500; and the paid search campaign, on which you spend $1,000.
After assessing the results, you would calculate ROI the following way for this project.
Revenue = Four new sales a week were attributed to the redesign and promotion. Each sale is worth $250 on average, and your promotion campaign ran for eight weeks. The total revenue you generated was $8,000 (eight weeks times $1,000 per week).
Investment = The outlay, in designers and your time, equaled $6,000.
Return = A quick assessment shows your profit was $2,000. Return = Revenue – Investment [$8,000 – $6,000 = $2,000].
ROI = Your ROI was 33 percent (your $2,000 profit divided by your $6,000 investment). In other words, every dollar you spent on the campaign generated $0.33 in profit.
Now, try this calculation for one of your marketing projects.
Follow the steps below to do a calculation for a marketing project. The formula is: ROI = Return ÷ Investment.
Don’t worry if your numbers are estimates. Even using rough numbers to see how programs compare can really shine a light on what works best.
1) What revenue will / did your marketing project generate? ________________
2) What expenses will / did you incur to generate this revenue? Be sure to consider not just dollars spent, but also the cost of your time and that of your team. ____________________________________
3) What is your return from these efforts? Return = Revenue – Investment, using the numbers you calculated above. _____________________________
4) Now calculate ROI (ROI = Return ÷ Investment).
Why go this extra step? This number gives you a payback figure that you can compare to the payback on other projects for an apples to apples evaluation of what gives you the greatest bang for your buck.
Compare your results
Complete your ROI calculation by viewing your returns in a few different ways. At the most fundamental level, ROI numbers, calculated across multiple projects in your company, can help you see the following:
- Whether your return is greater than your investment
- If your return is greater than that of an alternative use of your investment
This information on its own can help most businesses shift resources to where they generate the highest return. However, this view of ROI is a valuable, but imperfect, measure. You may also want to view the numbers you generate with the following in mind:
Long-term payback. Take a long-term view of investments to assess the return in the right light. Using the website redesign (Example 2), your redesigned site will probably generate increased sales for several years, even without paid search, and the new customers you acquire may come back for repeat sales time and again. In a basic ROI calculation, you may not apply a dollar amount to this, but you should consider it when you are assessing where to put your efforts.
Raised awareness. An elevated company profile is a very positive return on company efforts. It may not be part of your initial ROI calculation, since it rarely happens as quickly as other results. The Facebook campaign (Example 1) produced a tangible ROI; however, keep in mind that there are other followers that can see your message. Even though this exposure did not generate an immediate sale, over time as awareness builds, you’ll begin to see the impact. You can measure your brand awareness by tracking mentions of your company name across social media and conduct longer-term payback calculations on how these efforts are working for you.
The ROI exercise is important to small business success because it can help funnel in-demand money and time to the efforts that will give back the most. Build this valuable calculation into your programs and see how it can help to guide you on a path to success.Print this article