How To Measure ROI
December 10, 2018 - by Colter Hansen, CP, CGMA Blog Post, Marketing
Return on Investment (ROI), one of the most important acronyms for an entrepreneur and businessman. We always want to know what we will get in return for our investment, be it time, resources or money. If we can’t determine if the return is worth it, we usually won’t invest in the item or service. But ROI can be tricky to measure. There are certainly many ways to consider return on investment but two factors are extremely important when considering what “kind” of return you are actually getting:
Quantitative Returns- These are money, new customers, leads, etc. With quantitative returns you can see what exactly you receive from your investment, and you can measure it. Measuring meaning there are hard figures with a trail to follow and calculate.
Qualitative Returns- These are a bit harder to measure, things like employee satisfaction, customer awareness, value of a touchpoint with customers, brand recognition, etc.
When considering dollars invested and demand on those dollars there is plenty to spend your money on. I.E. vehicles for the company, equipment, the next awesome employee, software, tools, marketing, buildings, etc. The list goes one but the cash doesn’t unless you are Bill Gates or Jeff Bezos. Two extremely successful businessmen we can all aspire to imitate when it comes to returns on investment. Here are a couple of brief examples of what the above-mentioned returns look like.
Warehouse Management Software
Let’s say you invest $1,000 in a warehouse management software.
- The quantitative results will be challenging to measure but may include figures of hours saved per employee or the warehouse team and increased efficiencies in deliveries on time to customers, in turn…happy customers (qualitative).
- Qualitative results may include “happy customers”, more efficient employees, meaning more energy spent doing more productive tasks, maybe avoiding overtime, ultimately increasing overall satisfaction with their jobs.
Let’s say you invest $1,000 dollars into marketing.
- You receive $2,000 in sales. This is a 200% return on Ad Spend or 100% ROI, but you just cover product costs in the first month by doing this. You barely break even.
- Your qualitative returns signal that you have a higher brand recognition, etc.
Let’s say you have to find an accountant to take care of your books. You hire him, and things go great.
- Qualitatively you feel you got a great return. Your books are clean and up to date, you have better data, and you can make better, more informed decisions.
- Quantitatively you have no easily calculable return.
In this case your qualitative returns outweigh your quantitative returns.
While we would love to have Return on Investment be easily quantifiable it takes more thought that just the investment of one dollar to the return of two dollars. There may be quantitative and qualitative that take you far beyond just the two. Consider this as you invest your hard earned dollars because they don’t come easy unless you put them in the right places. Ultimately as executives or stewards over these type of decisions we simply want to makes sure we are making the best informed decisions.
Written by Colter Hansen