Thinking about ROI

Perhaps one of the toughest parts of being a micro business owner is deciding what efforts are going to provide you the best return on investment (ROI).  With many micro business owners limited in the amount they can invest on different initiatives (usually their marketing budgets are between 0-$500 per year), it can be stressful deciding where and how to allocate resources. A few poor investments that do not produce quality ROI for your micro business can spell disaster for the life of our business.

But what exactly is ROI and how does it relate to running your business? ROI is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments (for example: comparing different email marketing offers). You can calculate ROI by taking the benefit (return) of an investment and dividing it by the cost of the investment. The results are typically expressed as a percentage.

Here are few tips to think about when you are looking to measure your ROI and invest your resources effectively.

Consider the long tail: Many times business owners equate ROI as a dollar amount. They want to look at ROI as investing X dollars should generate Y dollars. This is fine, but don’t forget the other, non-tangible benefits that are brought in from an investment. For example, you spend $300 on a direct mail piece that contains a special coupon. If that coupon only generates $40 in revenue, is the campaign a failure? It might not be. What if that same direct mail piece helped sign up 20 new newsletter recipients and 25 new Facebook fans? And because those folks are now receiving updates from your business, roughly half of them go on to purchase 6-months after the direct mail piece was delivered. Though the short term ROI may not have been strong, the long term ROI gain from Facebook fans and newsletter recipients turned out to be a success.

More Money Does Not Guarantee More ROI: While possessing a marketing budget the size of a Fortune 500 company would most likely raise your company’s awareness in the marketplace, it doesn’t guarantee strong ROI. Your business should leverage the initiatives that will help deliver the highest ROI. For example, say your micro business sets up a free Facebook fan page for customers to interact and connect with your company. If you generate just one sale from that Facebook fan, you are already producing a high return on investment. It’s important to note that time and energy should be factored into ROI, not just money.  Social media takes time, so that costs you money in the long run.

Test before You Invest: Sustaining a strong ROI on your marketing efforts does not happen entirely out of luck. If you’re looking to invest in something that may be more expensive then you are comfortable spending, try a smaller scale of that same project. The scaled cost (and scaled results) will help you gain a better understanding if this initiative is worth your investment. Unfortunately you need to test your own initiatives as every business is different and making comparisons to other businesses is not feasible.

Set Goals: Like with all facets of your micro business, it’s suggested that you create goals for your ROI. While the simple goal would be “I just want to generate a lot of revenue,” setting goals allows you to determine if an initiative was successful for your business.

How do you measure ROI in your business? Do you measure simple revenue generate, or factor in other