Return on investment, better known as ROI, is a performance indicator that’s often used by businesses to determine profitability of an expenditure. It’s exceptionally useful for measuring success over time and taking the guesswork out of making future business decisions. The ability to calculate return on investment is extremely valuable for any business, regardless of size or industry.
After all, knowing if you’re getting your money’s worth is a basic concept that both individuals and businesses need to understand in order to strengthen — rather than hinder — financial success. By calculating ROI, you can better understand how well your business is doing and which areas could use improvement to help you achieve your goals.
At first glance, ROI calculation is relatively easy. Simply divide the gains from your investment by your investment’s cost and you have your answer as a percentage or ratio. If you calculate a positive number, you gained a return on your investment; if it’s negative, you lost money through your investment. For example, let’s say you’re a mid-size company that’s decided to purchase a new piece of software to boost profits. So, your ROI formula may look something like:
(Financial gains after software purchase – cost of software) / cost of software
This is a pretty straightforward formula that can be applied to practically any business department, no matter if it’s HR or marketing. However, determining ROI can be a bit more complex than a simple math equation. When calculating ROI, it’s important to take into consideration other factors that may be less obvious such as time, hidden costs and fees, and even emotional factors such as stress. All of these things can significantly impact your ROI. Let’s go back to the software return on investment example. Your “cost of software” shouldn’t just include the hard expense of the program — it can also include factors such as the time you spent exploring software options, training time for employees, and other hidden “costs”. Being mindful of these factors will help you more accurately measure your return on any investment.
ROI calculation gives you numerous advantages. The first and most obvious? Knowing your investment’s impact on your business. If you determine you’re wasting money on an expense, it’s a no-brainer that something needs to change. Many types of ROI can help you make important business decisions, including but not limited to:
Calculating your ROI gives you valuable insight that you can use to advance your strategy. These are just a few things you’ll learn by measuring your ROI:
Where to spend your money: Perhaps the most obvious insight you’ll gain through measuring ROI is where you should be spending your money. If you discover that one particular segment of your strategy isn’t yielding much of an ROI, you can better allocate your funds according to what works for your business.
Which tools to use to help your marketing succeed: If one particular tool helps increase profitability for your business, you’ll feel confident in spending your dollars.
It doesn’t matter if you’re a hiring manager, a director of marketing or a CEO: Practically every business decision requires knowledge of ROI. At NineTwoThree Digital Ventures, we excel in creating and developing custom software applications to help your business achieve more profitability. Have you ever purchased software to fulfill a specific use case and realized you overspent on the technology only to find out you only use a quarter of its functionality? Thats where NineTwoThree can assist in building a custom solution that checks off all the boxes rather than just a few. Ask us how we have helped other companies beat their revenue goals YoY with a custom tailored solution!