How ROI is Calculated (and Other Left-Brain Questions)

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One of the big signs you’ve matured as business owner — even if you’re still as immature as a 14-year-old — is ensuring every dollar of marketing, development, promotion, and executing you spend in your business has a clear connection to a positive return on investment (ROI).

$1 out, $2 in…as my mentor used to say. As long as every dollar you send out goes and out brings some friends back with him you’ll be wealthy every single day.

But if you didn’t grow up with a firm grasp of numbers — I failed Geometry twice in high school — you may wonder how ROI is calculated. And what the heck does a good ROI look like? And how can use it to boost your business strategy.

So, here’s a quick dive into the world of business ROI and how answering questions such as how ROI is calculated can help you focus, streamline and amplify your business.

How ROI Is Calculated

 

How ROI Is Measured?

The answer isn’t as obvious as you might think. Because there are essentially two different ways to calculate ROI.

1) MONEY EARNED / MONEY SPENT X 100 – If I spent 85 bucks on a marketing campaign, and made $164, then my ROI would be 192%.

2) MONEY EARNED / MONEY SPENT – If I spent $85 on marketing, and made $164, then my ROI would be 92%.

May sound like semantics, but the important thing is to pick ONE way to calculate ROI — a method that appeals to your way of numbers-crunching. (I prefer first way; the higher number is good for my self-esteem.) But whatever way you prefer, stick with it.

How Much ROI is Good?

Every business has a different set of short-term and long-term Math that informs it, but generally here’s how I look at it:

1) The FIRST ROI method (x100) – Any number UNDER 100% is a negative ROI. (Another reason I like this method; simple to understand.)

2) The SECOND ROI method – Any number UNDER 50% is a negative ROI.

Why ROI Is Important?

The power of ROI comes in its simplicity. As long as you have analytics in place, and are tracking every dollar you spend, you can QUICKLY determine whether campaign, initiative, or pet project you THINK is gonna be a winner..actually is one. (And save you from that all-important waste in your business.)

Determining your ROI also depersonalizes business decisions. You rely less on gut instinct and more on cold, hard, emotionless (somewhat robotic) data. (Scary at first, but very freeing if you stick with it.)

How ROI Can Be Increased

Any damn way you can.

Seriously, the real joy from learning how ROI is calculated is seeing tangible benefits from making small tweaks to improve ROI. This includes things like incrementally:

  • Boosting conversion rates
  • Reducing expenses
  • Increasing revenues on the back end
  • Redefining “return”

Because ROI isn’t always binary, a negative ROI doesn’t always mean you’re losing money. And learning how ROI is calculated or what ROI means won’t suddenly fix all your business’ ails.

It’s just a tool that gives you valuable information and lets you make reasoned, unemotional decisions quickly. And anything that does that is well above a 100% ROI.

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