In part one, we explored the importance of ROI, how to calculate it, and contextualizing ROI to your business. Now, we’re going to dive into securing funding and approval for your budget and align your ROI messaging with broader business goals during the planning stages.

Securing Funding and Approval for Your Budget
As we have discussed, ROI is going to be an important point of consideration for key decision makers at any business. Your ultimate goal is to craft a compelling case for your initiative, and its ROI is a key piece of evidence. However, when you’re self-evaluating the financial viability of your offer, product, or service, packaging your funding request, and preparing your presentation for the C-Suite, you’ll need to make sure that everything you include is in service of the story you’re trying to tell.

First and foremost, your digital strategy needs to be aligned with your overall business strategy. Ask yourself some key questions:

• What is currently being measured, and where are you today? 

• What’s the target goal, and what’s the desired outcome or benefit to reaching that goal?

•  Are there any trade-offs or counterbalances to achieving your desired benefit? 

Retail customers who enjoy in-person assistance, for example, might not be satisfied by an initiative which seeks to increase digital interactions. Assessing these tradeoffs and any inherent risks – like market volatility or operational challenges – can help you to identify potential uncertainties and estimate their impact on ROI. Those sorts of intangible factors can potentially contribute to an investment’s success, too – like brand reputation or customer satisfaction. Evaluating these factors alongside risks and financial metrics will provide you – and your audience – with a more holistic perspective on ROI.

A strong funding proposal presents a strong case for the value it will bring to an investment. In many cases, the value of a proposal is straightforwardly calculable – for ecommerce operations, the formula can be as simple as Revenue = Traffic x Conversion x AOV. Using revenue-only calculations has some built-in limitations, however. It doesn’t account for the costs associated with an initiative, so you may run the risk of painting a distorted picture of revenue increases that don’t necessarily translate to increases in profit. Different types of projects will have different kinds of costs associated with them. What makes ROI so useful in demonstrating the value of a proposal is the role it plays in providing a clear and quantifiable basis for decision-making and comparison to different types of projects.

There are several different types of ROI calculations, and each lends itself to different methods of analysis and yield their own unique insights. Some of the most common methods include simple ROI, payback period, Net Present Value (NPV), Internal Rate of Return (IRR), and break-even analysis. Each of these methods serves a specific purpose, and are used in different contexts to evaluate the profitability of an investment.

Simple ROI can be found by dividing the net profit of an investment by its cost and multiplying by 100 to find a percentage rate of return. To illustrate, let’s imagine an opportunity to invest in a lemonade stand. To produce a batch of 100 glasses of lemonade, the stand will need 100 lemons and 100 packets of sugar. Each lemon and each packet of sugar costs 50 cents, so producing 100 glasses of lemonade will require an initial investment of 100 dollars. The lemonade stand plans to sell each glass of lemonade for one dollar and 25 cents each. If the stand sells all the lemonade they produce, they will generate a gross revenue of 125 dollars. Subtracting the initial investment from the gross revenue shows that the lemonade stand made a net profit of 25 dollars. Plugging that into the formula, we find that ROI = (25 / 100) x 100 = 25%.

Avoiding Common ROI Pitfalls
While ROI is an important tool for evaluating an initiative, it is not a guaranteed or infallible figure, and you should be prepared to perform a detailed analysis if investments are not yielding expected returns. Unforeseeable strategic, operational, or cultural missteps can sometimes lead to disappointing returns, but there are other factors at play as well. ROI is often calculated before a project begins, and should be treated as a hypothesis or an anticipated or expected outcome. It’s most commonly used as a point of comparison to determine if a project makes sense to pursue. In many instances, you may calculate multiple ROI figures, adjusting estimated costs, revenue, and other assumptions to account for different possible scenarios and paint a more complete picture of the risk associated with the investment. After the project concludes, you’ll be able to calculate your actual ROI to find the true returns on the investment and compare it to what you initially estimated.

In your initial conversations, it’s possible that you may fall into any number of common pitfalls. Some decision makers may care about more than the bottom line – in cases like this, ROI estimates aren’t likely to be as persuasive. Be careful to avoid making assumptions that are not based in reality, and take care to discourage these assumptions in decision makers, since this can negatively affect the accuracy and reliability of your estimates. Your ROI messaging needs to be relevant and compelling to your decision-making audience, which is why it’s important to align your ROI messaging with broader business goals during the planning stages.

Addressing some core issues from the outset will help you anticipate and avoid possible pitfalls along the way. When you’re proposing your project, you need to not only communicate but also validate your calculated ROI with stakeholders. Present the ROI analysis clearly and concisely, and highlight your assumptions, data sources, and methods to address any potential questions or objections. Make sure to explain how the investment aligns with your vision and strategy – and, of course, how it supports business goals and customer needs.

Being able to overcome risk aversion and encourage a culture of innovation is going to go a long way towards the ultimate success of your proposal. Have you ever pitched a project to senior management only to have the idea shot down for “not making financial sense?” By learning how to calculate ROI for projects, you’ll be able to self-evaluate a proposal before you bring it to decision makers and prepare to defend it as it’s being considered. By learning to calculate ROI after the project is done, you can better speak to future risks and contributions toward shared company goals. High-performing businesses are successful because they make smart decisions about when and where they allocate available resources. Calculating a project’s ROI before it moves forward ensures that you’re making the best possible use of the resources you have available.

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.