Small Business Promotion Coach

Return On Investment

Return on investment (ROI) is a simple but often ignored metric. Mastering the use of this metric can mean the difference between just barely surviving and thriving.

Like all metrics ROI answers a question. And that question is “How much did I make compared to how much I spent?”

The formula for ROI is:   the amount you made/the amount you spent.

For example, let’s say that you bought an advertisement in the local paper announcing a special offer. The price of the advertisement was $100. Over the next two weeks you sold 100 units. The profit is two dollars each so you made $200 total. Therefore your ROI is $200/$100 = $2.

In other words you made two dollars for each dollar you spent. That’s pretty good!

Now if you had only made $50 then your ROI would have been $50/$100 =$.5

In other words you made 50 cents for every dollar you spent. (Bummer!)

The Devil is in the details

Half the ROI formula doesn’t do you any good.

Looking at the formula you can see that you need to know two things. 1.) How much you made. 2.) How much you spent.

Most of my small business clients can tell me how much they spent on a advertisement. But they often have no idea how much they made.

Let’s use my favorite target as an example “the yellow pages”. Every year you plunk down a bunch of cash for yellow page advertising. You know exactly how much you spent. But, how much did that advertisement make you? Don’t know?

If you don’t know how much your yellow page ad made you, then how can you make a smart decision about whether or not to buy next year?

Make Money Giving Away Stuff

Let’s say you have decided to give away a service. For this example, let’s imagine that you own a jewelry store.  So you put an ad in the local paper that costs you $100.

The ad say that for this week on Wednesday to Friday you will be giving away free jewelry cleaning. Regularly $19.95.

Being a smart entrepreneur you have prepared a sales pitch for your sales staff to be delivered while the customer is waiting for their jewelry to be cleaned. After all, they will have to talk about something while they wait.

The pitch is very low key. Along the lines of “while were waiting for that to finish, let me show you some of the new pieces we just got in that would go perfectly with the ring” (Or whatever they brought in.)

The key part is to make sure that when any sales are made, a record is kept of whether the customer was in there for the free cleaning or not.

The math then becomes very simple. Let’s say you sold $400.00 worth of merchandise as a direct result of the ad.  So your ROI becomes $400/$100 or $4. You made $4 for every $1 you spend. Nice!

Time Is Money

Don’t forget that costs are not limited to money. Buying an ad cost money but takes very little time. Working on your Facebook fan page cost no money but does take time.  The easiest way to do this is to convert your time to dollars.

This can sometimes be hard to do. If you were to hire someone full time to keep up with your online activities, then the cost is simple to calculate.

But, what if you have one of your staff members manage your online activities between customers? Time they would have spent chatting with other staff is now productive time. The real cost drops to almost 0. If sales result then the ROI becomes huge because your out-of-pocket expense is so low.

Conclusion

Know your ROI. It is a powerful tool for helping you decide where (or if) you should invest our time/money. All businesses have limited resources. Money and time must be spent where they will generate the most return. ROI is your key for making these types of decisions.