ROI is the core of every business.
An acronym for Return of Investment, ROI is a numeric value that indicates the overall profitability of a corporation. It is calculated by dividing total income in a fiscal year by preferred and common stock equity added to all long term debts.
In other words, this is a value that shows how a company optimizes its capital resources to make maximum profit.
ROI could also be taken as an indicator that shows how well your investments are working for you.
ROI is the most comprehensive indicator of your business
ROI is not confined to showing you profits and losses.
Rather, it shows you the value of your investment.
Three major parameters define intelligent investment.
They are capital invested, returns obtained and the value of individual returns.
For example, out of the two channels that you use for marketing, one channel gets you twenty leads and the other channel gets you ten leads at the same cost. Between the two, if the ten leads generated through the second channel get find you $5000 and the twenty leads through the first channel get you business to the tune of $6000, which of the two channels would you deem better for your business?
Although overall profitability is higher through the first channel, per capita returns on leads obtained from the second channel are higher.
This means that if you put more efforts on the second channel, your overall returns will be higher.
A lot of permutations, combinations and use of linear programming concepts go into identifying sources of best outcomes.
ROI is a comprehensive term that evaluates all these parameters and shows them in the form of one numeric value.
Importance of ROI
ROI is the fuel that powers your business by making you aware of the worth of every dollar you spend.
A business makes different kinds of investments, from production and distribution to marketing and many more.
ROI should be calculated for each of these investments individually so that elements that are not performing well can be identified.
You can either choose to stop pumping more capital into low return channels or alter your strategy.
Determining ROI also helps you identify those channels which bring in maximum returns.
On the whole, profits of the business are optimized and capital spent on low return channels can be regulated.
ROI provides a reliable quantitative base to make better investment decisions.
Furthermore, every investment can be analyzed and strategized so as to increase returns without increasing expense. When times are tough for a business, ROI is one concept that can help a business sustain itself by optimizing productive channels and minimizing on less productive or unproductive channels.
ROI gives hard numbers that make decisions simpler and smarter.
A customer also thinks about his ROI when he buys your product. If your product costs $100 and within a year, he has to spend another $50 on maintenance, he naturally decides to buy a product from your competitor which might cost $125 but does not incur more than $10 on maintenance.
ROI not only helps you keep track of your investments, but also helps you understand what your customers think about investing with you.
Cumulatively, all these considerations contribute to better profitability.
For greater growth and prosperity, ROI is the bottom line for any business.