What is ROI and Why is it Important to Your Business?

importance of roi

ROI is a term that’s very important to business owners and investors alike. It is the single most important factor that can make or break all the efforts an investor or entrepreneur puts into a venture while financing it. ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare the efficiency of different investments. The return on investment formula is: ROI = (Revenue from Investment – Cost of Investment)/ Cost of Investment. Return on investment is a relative term which is used to find out and evaluate the efficiency and output of an investment or of several different investments. So what does this mean to your small business or startup? Basically, ROI is a simple calculation that will determine the bottom line return of any investment. ROI is a useful starting point for sizing up any investment, but keep in mind that it is a historical measure, meaning it only calculates past returns. An investment can do very well in the past and still falter in the future.

How do I calculate ROI?

The calculation is a fairly simple one. It involves dividing the gains from your investment by the cost of your investment. The result is expressed as a percentage or a ratio and this answer determines whether or not you gained any returns. If you calculate a positive number, you gained a return on your investment; if it’s negative, you lost money through your investment.

An example is shown with the calculation of a marketing ROI. The result of this can help us learn from past purchases and make better ones in the future. Imagine that you joined a travelling business seminar that gives members an audience to pitch to at each destination they reach. Assume that the yearly fee for being a speaker on this travelling seminar is 1000 and that the cost of actually speaking in each seminar is 100. If you’ve attended 6 seminars so far and the cost of travel, feeding and lodging for each one of them is 300. Also don’t forget that your time factors into the calculation as well. You have to calculate the mean revenue you would generate if you were to be working for the time you spend on this seminar. Let’s assume a value of 250 for each meeting. Adding up the cost gives us:

Yearly fee:                  1000
6 seminars x 100:        600
6 seminars x 300:      1800
6 seminars x 250:      1500
Total cost:                  4900

The revenue generated from this would be the number of new clients multiplied by the revenue gotten from each one for the period of a year. Assuming we got 300 clients from all the seminars and each brought in 20 during the year. Also assume that we lost 20 clients due to unforeseen circumstances. That would make the revenue generated that year through the seminars to come to:

(300-20) x 20:          5600

It becomes obvious that we gain from this marketing source and that chances are that the cumulative effects of this marketing will be even more in the second year as we get more customers and keep the ones we’ve already gotten this year.

Getting the most out of ROI

Knowing your marketing ROI will be of immense help when deciding your marketing strategy. Your marketing ROI will teach you a few things, including: Where to focus spending, how to adjust your strategy and which tools increase profit. Of these three, knowing where to focus spending is probably the most important take away from calculating your ROI.

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