Unpacking Return on Investment: What Every Business Owner Needs to Know

Nelet Kok
September 29, 2022

As a business owner, you are always looking for ways to make more money and improve your bottom line. One way to do this is by increasing your return on investment (ROI). In this blog post, we will break down what ROI is and how you can use it to make sound marketing decisions, to ultimately grow your business. So, if you're ready to learn more about this important metric, keep reading!

Initially used as a financial metric, it is said that the term stems from an assistant Treasurer called Donaldson Brown who, in 1914, put this measurement into place to measure the business' combined earnings, working capital, and investments. It's worthwhile to know he became the Treasurer in 1918 and continued to work for the company until 1946!

What is Return on Investment (ROI)?

To simply put it, it means weighing up the input (funds, time and other resources) that was put into a campaign, a new line, a stock item, an event or an element of marketing to what the outcome was. The cost (input) vs the benefit (output).

This can look like:

  • How many leads came in?
  • How many sales were made?
  • How many members joined our community?

By understanding the ROI, you can understand if what you're doing is working and making you money or not. It's also a good measure to compare different marketing activities against each other. For example, if you're trying to decide whether to invest in a new website or run a Facebook ads campaign, you can use ROI to help you make that decision.

When to Know When The Input Outweigh the Output

There is no one answer to this question. Every business owner will have different goals and objectives, and what works for one business might not work for another. However, there are some general guidelines you can follow when trying to determine whether or not your ROI is positive.

  1. If you're seeing a positive return on your investment (meaning you're making more money than you're spending), then you're on the right track! Keep with the activities or campaigns that brought you to this point. On the other hand, if you're losing money, then it's time to reevaluate your strategy. You may need to cut back on your spending or invest in a different platform, marketing campaign or outreach altogether.
  2. If your overall strategy is shaped to absorb this loss, because the total outreach or wins, is worth it and is in line with what you had planned.  For example, you might have a plan to increase brand awareness and this is usually an activity that has a longer-term goal. If one Facebook campaign, of the four that was done during the month, has a bad outcome it's worth looking at an average of the month. Rather than isolating the campaign and labelling it as a failure.

#TweakTip: ask yourself questions like:

  • Did the risks that I took outweigh the outcome? Perhaps it was a market day you haven't tried before or a new social media platform.
  • Did this activity bring in new customers or community members? If you aim to build your brand, community members are worthwhile in the long run, as they become customers.

Common Misconceptions About ROI

There are a few common misconceptions about ROI that we want to clear up.

First, ROI is not the same thing as profit. Profit is the total amount of money you make, minus the total amount of money you spend. ROI, on the other hand, is a ratio that compares your profit to your investment. This allows you to identify elements that work and to unpack them to see what in the campaign or conference contributed to its success.

Second, ROI is not always easy to calculate. There are a lot of factors that go into it, and it can be difficult to track all of them. However, there are plenty of resources and tools available to help you calculate your ROI.

Finally, ROI is not the only thing you should look at when evaluating your marketing efforts. While it's important to know if you're making money or losing money, there are other factors to consider as well. For example, you might not see a positive return on investment right away, but you might see other benefits, such as increased brand awareness or improved customer loyalty.

We hope this article helped clear up some of the confusion around ROI. If you have any questions, feel free to reach out to us! #TeamTweak has a Facebook Live Stream every Tuesday at 11am (central time).

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