Welcome back to business basics! In case you’ve forgotten, every week we take a look at a basic business concept in order to try to help new business owners better understand it. This week, we are covering Return on Investment, or ROI – a fairly straightforward, but often misunderstood, part of running a business! Though you may think you know all about ROI, you could be using it incorrectly. But first…
What is ROI?
Return on Investment, or ROI, is pretty easy to grasp – heck, the definition is right in the name. It’s whatever return you get after your invest in some part of your business. So if you hire 2 new salespeople, a basic measurement of ROI will be the money they bring in, minus their wages. ROI is usually applied to the parts of the business related to money – hiring, growth, marketing, etc. And, for the most part, that’s where it stays. Unfortunately, because ROI is so simple to use and understand, it’s often misapplied.
ROI isn’t all monetary
A lot of new business owners don’t realize this. They’ll kill a program, department, or campaign, simply because they aren’t getting as much money out of it as they wanted. But if you look at ROI through a purely monetary perspective, you could be missing out on the bigger picture. Social media marketing, for example, is notoriously hard to quantify. And yet business analysts and marketers nearly unanimously agree that social marketing is one of the best ways to reach new customers. You just can’t quickly quantify some metrics. A partnership, for example, could lead to networking opportunities and new ideas, along with the expected referrals. You simply cannot rely solely on your finances when figuring out if you’re creating a positive ROI.
Sometimes a low ROI is worth the effort
We aren’t saying you should sink time and money into programs that aren’t paying off. By all means, if you feel like your business is suffering because of a bad investment, cut it off. But you also need to remember that a lower ROI shouldn’t be a death knell. If you are seriously considering ending something you’ve invested money in – be it a new ad campaign, a partnership, or some other, internal program – take a good, hard look at what you’ve gotten out of it so far. Spending the money and time to get a blog going and regularly updated, for example, may not feel like its yielding any results, but content marketing has become one of the main ways that people find out about companies online.
When you first get started, it can all too easy to just start slashing whatever isn’t yielding immediate results. But if you cut something simply because it doesn’t seem to be making much money, you could be hurting yourself later on. Remember that ROI isn’t just about how much money you’re making – there are loads of qualitative factors that should weighed right along with the quantitive.