Thousands of companies go bankrupt in the world every year. Of course, this happens for various reasons, but often only because the company does not know how to correctly assess those performance indicators that are vital for its successful operation. There are numberous of all kinds of performance indicators for every business, not all of them are correct, not all of them bring real benefits. Today we will focus on the indicator, which, in fact, helps to manage the profitability of any business and adjust the investment strategy depending on the return on investment. This indicator is ROI.
- About ROI and investments
- Are ROMI and ROAS calculations necessary?
- ROI calculation pitfalls
- Maybe it’s easier to automate?
- What is good for ROI and what is bad for ROI?
About ROI and investments
It is no secret that throughout the entire path of business functioning, it can go through different periods – experience ups and downs, increase or decrease its profits. And in order not only to stay afloat, but also to develop efficiently, a business needs to carry out constant activity to invest capital in order to make a profit. That is, implement activity of investing.
Investments can be of a different plan, from different sources, of various sizes. But whatever the type, volume and direction of investments, they are united by one common action – sooner or later, any investments must be evaluated to analyze their success.
There is an indicator in the economic system that just illustrates how profitable or unprofitable the investment was made. This indicator is called the payback ratio or return on investment indicator;it has its own designation – ROI – and a certain calculation formula.
Are ROMI and ROAS calculations necessary?
Studying the materials on calculating the return on investment, quite often newcomers ask themselves the question: why, in addition to ROI, do they have to deal with the calculations of two more indicators of return on investment – ROMI and ROAS?At the same time, the basic formula for calculating all three indicators remains unchanged. And this is correct, because ROI, ROMI, and ROAS answer the same question: did the business receive more capital than it spent? What, then, is the difference between indicators?In the sources of income and expenses used for calculations.
ROI is a universal indicator; its calculation is based on the total capital spent on the business.
ROMI is an indicator that takes into account only marketing investments.
ROAS is an indicator that takes into account only advertising costs and incomes earned from this advertising.
ROI calculation pitfalls
So, what kind of difficulties can be expected by specialists who decided to assess the return on investment using the ROI indicator? You already know that this indicator can be used to calculate the return on investment in any area of business.The peculiarity of calculations in relation to marketing lies in the fact that the ROI indicator is replaced by the ROMI indicator, which is inherent only in marketing.
For many years now, there has been a discussion among marketers about whether it is possible to apply the ROI indicator (ROMI) calculation of profitability to all marketing activities? Practice has convincingly confirmed only some of the marketing tasks, the profitability of which falls under the influence of ROI (ROMI).These are definitely direct marketing, sales promotion, CRM and other projects related to the growth of loyalty, work with consumer complaints.At the same time, ROI (ROMI) calculation is not possible for other types of marketing activities.
Maybe it’s easier to automate?
Like any process that is based on manual calculations, the process of calculating a payback indicator without using software services is doomed to a significant number of all kinds of errors and inconsistencies. Therefore, the use of all kinds of instrumental helpers to obtain the most correct results is definitely welcomed. Services Google Analytics, Google Sheets, OWOX BI Smart Data and the like will allow not only to optimize the calculation process, but also to get the result as close to reality as possible.
What is good for ROI and what is bad for ROI?
Probably everyone who, in one way or another, is faced with calculating the benefit from capital investments would like to know which value of the payback indicator is considered “good” and which is “bad”. There can be only one answer here – in each individual project, the meaning of ROI should be interpreted individually. By themselves, the numbers do not carry meaningful information. In some cases, a low indicator value may well arise at the initial stage of the implementation of any successful project. If the ROI is less than 100%, there is a reason to think and either reduce costs or continue to invest.
So, it becomes clear that calculating the return on investment is a necessary element of doing business.In this case, of course, the result will largely depend on the volume and quality of the initial data.This means that the automation of this process is not a whim, but a vital necessity.