Know Your ROI

ROI, Return On Investment, is a measure of success. Did what you put into something produce a profit or benefit, and if so, how much? Was it worth it? More often than not, when we are talking about ROI, we’re talking about money and profit. However, it could also mean time and effort put into a project. The point of looking at the ROI is to determine if it makes sense to do it again.

Businessman drawing ROI (return on investment)

As an example, let’s look at running an advertisement in a local magazine. Say the ad cost you $650 and will run for a month. First, how are you going to know if it worked? You should always ask new clients/members how they heard about you. This is your effectiveness tracker. From this ad, you get only one new client. Was it worth it? Before you get all “What? I placed this ad and only got one new client??? That’s not worth it.”, think about what one new client is worth. If a client trains with you once a week (staying somewhat conservative) for a year and you charge $65/session, that means that just for that first year that client is worth (let’s see… $65 x 52 weeks = $3380) $3380. What was the ROI on that ad? One way to figure that out is to subtract the investment (or cost) from the gross income which gives you your net income or profit. Then divide the net income by the cost, in this case $3380 – $650 = $2730 divided by $650 which + 4.2 or 420% ROI. This, at least in my books, is a worthwhile investment.

jack-of-all-tradesThat was a straight financial example. Sometimes your investment is your time in putting together or creating a project or program. Because I’m good at a lot of things (you know, jack of all trades, master of.. well, a couple) this is where I often find myself. I could do it myself, but… is that where my time best spent? To find the ROI on a project or program you need to look at the cost of spending your (or someone else’s) time compared to what kind of return you will get. If a project is going to take you 10 hours and your hourly rate is $65, that’s a $650 investment. Estimate what you believe your return will be and then calculate the ROI for the project. Is it worth you spending your time to do it? Could you get a better ROI by having someone else do the work? This is an important exercise to go through.

Now, of course, not everything has to have a profit to be worth undertaking. Maybe you spend time or money on something where the only return will be the self-satisfaction of having done something good for someone else. This can include hosting or supporting some benefit event. Here, you simply need to ask, “Can I afford to do it?” and “Is it important enough to me, for me to invest in it?”

Understanding the ROI on your investments is crucial to building and maintaining a healthy business. Make sure you track the successes and, yes, failures by looking at the ROI of your efforts.

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