Measuring The ROI Of Your Business Operations

ROI (Return on Investment) is a critical metric for any business looking to measure the effectiveness of its efforts. But how do you measure it?

The formula is as follows: ROI = (Gain - Cost) / Cost

This seems simple enough, but in a business, the challenge often comes not in getting that number, but in attributing the costs and gains correctly, to ensure that the effectiveness of each area of the company is properly examined. You can do this in a range of ways, which we’ll examine below.

Product

Measuring ROI on a product basis allows you to see which of your products bring in the most profit. This allows you to make better decisions when it comes to which products you offer, which to invest in, and which to phase out over time.

A similar calculation can be used for services - by looking at the ROI of individual services your business provides, you can see which have the potential to generate the most profit, and which should be scaled back.

With both of these, however, it’s important to use ROI as just one factor in deciding if a product or service is worth continuing with. It’s important to also consider how these products and services link into your other offerings. Are they a loss leader for a product with a better ROI? Do they allow you to sell additional services that provide more profit? Only by taking a full and considered look at all the facts can you come to a decision on the worth of a specific product or service to your business.

Category

To help with the above, you could instead examine a category of business offering, such as electronics. By examining the ROI of that category as a whole, you can more quickly make a high-level decision on which categories are deserving of more investment. This allows you to avoid taking a low-level view, making it very useful for long-term planning.

Measure your potential ROI with our inbound calculator.

Marketing

Often, measuring the ROI of marketing efforts is overlooked by businesses, despite the face it’s critical when determining how successful marketing has been. There are a couple of different ways to calculate marketing ROI, based on the type of business you are, and the type of marketing campaign you are running.

Units Sold

This calculation is useful when measuring the effectiveness of a marketing campaign designed to sell products.

(Gross Profit - Marketing Costs) / Marketing Costs

This calculation looks at the gross profit, compared to the marketing costs on that campaign. This calculation is useful when looking at the short-term impact of a particular marketing campaign, particularly those that are trying to drive sales. However, it is less useful when looking at campaigns designed to drive long-term value, such as those designed to promote brand awareness.

Customer Lifetime Value

The other option is to therefore measure the customer’s lifetime value, which revolves around a similar calculation.

(Customer Lifetime Value - Marketing Costs) / Marketing Costs

This calculation replaces the gross profit with the customer lifetime value, instead measuring the marketing based on the lifetime value of each customer it brings in. This is useful when taking a longer-term view, particularly for businesses who sell services on contracts, rather than one-off purchases.

These are both calculations based on analysing the effectiveness of a campaign as a whole - however it’s also possible to break this down further, and analyse the ROI by marketing channel and platform to see which is the best performer. There are a number of different models you can use to attribute sales to different channels - more information on the types of analytics models that can be used to track this can be found here.

Equipment & Technology

Measuring the return on investment in new technology and equipment is a great way to see how upgrading business infrastructure can improve the profitability of your business. For equipment designed to cut costs and improve efficiency, this calculation is fairly simple.

(Savings - Equipment Costs) / Equipment Costs

This calculation allows you to assess the how the savings will be balanced against the costs of the new equipment. This can help when analysing the potential for savings represented by new equipment, and can help to justify a purchase. One factor to consider is the period over which you hope to see the savings - this could be the estimated lifetime of the product, or a 12 month period.

Now That I Know My ROI, Now What?

Measuring the ROI of business functions allows you to make educated judgements about how the business is performing. It’s a great metric to use when deciding where to invest, as well as where cutbacks can be made.

Here at SpotDev, we make sure to consider the ROI of all the marketing campaigns we do - and we’ve even got an ROI calculator so you can get a better idea of how investing in Inbound Marketing could help your business.