Enhancing ROI for Lasting Business Success, Part 1

Cultivating a successful business is about more than just numbers. Every business big and small begins with – and maintains at its heart – a powerful idea, a stroke of creative inspiration, and a thrumming drive toward a shared vision. A whole lot of it is about numbers, though. No matter how disruptive your product or innovative your approach, a business case cannot be effective without a calculated return on investment (ROI). Being able to understand – and subsequently, to communicate – the key elements that inform ROI, like revenue, costs, time, risk, and even intangible factors, will both enable your initiative to stand up to comprehensive analysis and, most importantly, communicate its value to stakeholders and decision makers in tangible terms. 

There is no single best approach to take with your ROI calculation. Different methods for calculating ROI may use differing inputs at varying weights, and will each yield their own insights into different aspects of or perspectives on investment profitability. The right way to calculate ROI is whichever way is right for you – identify the measurements that are most relevant or important to your initiative, and work from there. 

No matter the approach, however, transparency in your data gathering, analysis, and interpretation will be essential for the reliability of your project’s ROI. That’s not to say there isn’t any room to make assumptions. Being up front about those with stakeholders can be critical to move the discussion forward. In the end, you’ll find the most success by cultivating an ROI-focused mindset that informs your overall approach. This will ultimately lead to better decision-making and alignment with larger business objectives.

Navigating the Modern Landscape
Interest rates will always fluctuate. As a direct result, the cost of capital will change, and many businesses will be forced to make trade-off decisions in their investments. As a measurement of the profitability of an investment relative to its cost, a project’s ROI is likely to be a crucial point of focus when it comes to those kinds of decisions. So before we go any further, let’s review the basic terms:

A project’s revenue represents the total income that a project generates. A project’s costs will include all its expenses associated. The net profit of a project is the amount of income generated after expenses are recouped – you can find this by subtracting total costs from total revenue. A project’s ROI is calculated by dividing its net profit by its cost, and then multiplying the result by 100. This will represent ROI as a percentage. Expressed as a formula, the calculation to find ROI is: ROI = (net profit / cost) x 100, or ROI = ((revenue –  cost) / cost) x 100. 

The good news is, this figure is generally pretty easy to calculate. You only need to plug in a few figures to get it, and these should be readily available on financial statements or balance sheets. Because it’s so easy to calculate, it’s used very widely as a measurement of profitability, and can therefore enable comparisons for a wide range of investment returns. This sets a standard for evaluating financial viability. No matter how wildly different financial projects may vary in their type or scale, ROI figures serve as an even playing field for comparison and evaluation. Because of this, ROI analysis is an important tool that businesses use to evaluate success, identify profitable opportunities, justify investments, and inform their future strategies.

As with any tool, even the most useful ones, ROI figures come with their own set of limitations. The factor of time, for example, does not play a role in the equation, which can potentially lead to some false conclusions. While higher ROI may always seem to indicate the better investment, it will in reality fail to match an investment that is able to produce a slightly lower ROI more quickly. The missing factor of time ends up being an important differentiation between businesses backed by private equity and publicly traded companies.

ROI calculations can also differ between areas of a single business. Different departments, or even different teams, can all potentially be represented by their own ROI. Calculating ROI for the whole business, therefore, can fail to identify areas of improvement within the business. Calculating ROI for different areas of the business, on the other hand, can generate a false sense of equivalence – there’s no way for ROI to account for intangible or nonfinancial benefits, like the way different areas of a business work together or complement one another to accomplish their goals. It’s counterintuitive, but intangible or nonfinancial benefits can lead some low-ROI investments to increase the overall value of a business more than a higher-ROI investment would have. It’s a simple equation, but dimensionalizing and contextualizing ROI to your business and use case is where the art of ROI storytelling comes in.

Stay tuned for part two where we’ll dive into securing funding and approval for your budget. This article is adapted from our most recent white paper Strategies for Maximizing the ROI of Tech Initiatives: A Field Guide for Ecommerce, Marketing, and Digital Leaders.