Return on Investment is a topic I often revisit. First of all because I think it is always important to be able to provide insights in the value (Return) of Digital. Second of all since I prefer to find the simplest way for myself to discuss Return on Investment (ROI).
The Basics of ROI are Simple
Just to take you back to what I wrote earlier about ROI and which is still valid. ROI is something simple and exists for a long time. Long before Digital was entering the enterprise, people were calculating ROI for desk phones, office lease or anything else in which they could or had to invest money and wanted to know the return. ROI in itself is just a basic calculation:
ROI = (Gains – Investment) / Investment
Input is everything
Every calculation is as successful as the input that is provided. So leverage the right data and don’t fall into the trap of vanity metrics. For me Vanity Metrics are identifiable by either one of these two characteristics:
- You are reporting Aggregated Numbers (example: total number of users since day 1)
- Non Actionable Metrics (example: followers on Twitter)
Making ROI simpler to discuss
While ROI is just a calculation, you could avoid the whole debate or have an easier time presenting by making things less abstract. These are three questions you should ask and answer:
1. Does it Make Money?
Simple question, simple answer. If the answer is yes, your next question is: can you make sure it makes enough money so it is worth the investment. Based on my personal experiences: most often you can. As soon as something is making money you can start optimising and tweaking it to grow this stream of revenue. I am fully aware revenue is not profit, however if you do something new (or in a new way) and it is making more money than the old way for a similar investment you basically already did your ROI calculation.
2. Does it Save Costs?
Are the things you are doing more effective or efficient with the use Digital? Are you saving the company money on execution while not jeopardising any revenues and margins? If so, you’ve got a clear winner, since you have just lowered the overall investment while kept the gains at least similar.
3. Does it Make Customers Happy?
Paying customers are the bread and butter for most companies. Therefore if you support your customers by making them happy via digital you are reducing the risk of them going elsewhere. Retention is a lot cheaper than acquiring new customers. Making your customers happy in order to retain them is a very smart investment with very concrete returns.
The answers on these questions are the answers to the ROI question
Remove the abstraction where possible: ROI is just a number, it is up to you to make it into something tangible. The sweet spot of course is when all three questions are answered with a ‘yes’. With two out of three you are still pretty good and even with one “yes” it still can be a no brainer to move forward. Just remove the abstraction and speak a common language with your stakeholders.