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10 most common mistakes in calculating ROI 0

Posted on December 02, 2018 by Rob Petersen

 

calculating roi

Calculating ROI (Return on Investment) is based on a simple formula involving the gain from an investment, the cost of the investment and the resulting ROI. Here it is:

calculating roi - roi calculation

Yet, to many, it is one of the most desired but vexing business measurements. Why?

Here are the 10 most common mistakes businesses make in calculating ROI.

  1. CONFUSION BETWEEN CASH FLOW AND GAINS: A common mistake in calculating ROI is comparing the initial investment, which is always in cash, with the gain as measured by profit or (in some cases) revenue. And not basing the gain on cash flow. For example, customers might be billed but that doesn’t mean they all pay on time. Or shipments might have gone out. But some goods might have been returned. The correct approach is always to base the gain, either profits or revenue, on the cash flow received.
  2. UNDERESTIMATE INITIAL COSTS: Many businesses try calculating ROI without first properly accounting for all initial costs. As a result, they may end up underestimating initial costs. Before you start your calculations, know what your initial costs are. Here are some of the areas that might be missed.
  3. FAIL TO INCLUDE PEOPLE’S TIME: One of the reason ROI is a highly regarded measurement is it includes not just out-of-pocket costs but operational costs like labor. Most business owners are aware that time is money for any company. However, when it comes to calculating ROI, they forget to consider the value of their time or that of their employees.
  4. DON’T KNOW THE MINIMUM RETURN REQUIRED: Take into consideration the minimum ROI that your company requires because there probably is one. Look at the relative risks, cost of capital, and opportunity costs. Here’s what experts say is a good ROI for various industries. Even if it hasn’t been formally stated, have the discussion to bring it out when you start calculating ROI.
  5. MEASURE THE WRONG THING: In 2010, Pepsi launched the Pepsi Refresh Project, an initiative where people could submit and vote for their favorite nonprofit projects to receive grants from Pepsi. The project generated 3.5 million Facebook likes, 60,000 Twitter followers, and over 80 million votes for nonprofits. But it didn’t sell more Pepsi. Pepsi cancelled the project in 2012 after falling from second to third place in national soda market share. It was a noble initiative, but likes, followers and votes were not the right measurements for ROI.
  6. MEASURE TOO MANY THINGS: In data-rich environments, it’s easy to lose sight of the metrics that really matter. Before calculating ROI, know the Key Performance Indicators (KPIs) for your business. KPIs are the metrics that matter for any business. They are metrics that, just like your ROI, have a target. If you don’t know them, you may find yourself measuring too many things.
  7. DON’T LEVERAGE EXISTING CAPABILITIES: A manager at a large wireless telecommunications firm recently called for help with her budget. She’d “taken a stab” at quantifying the ROI for the company’s data warehouse and wanted to review her calculations. Her worksheet—which included a rigorous mix of hardware, software licenses, maintenance, burdened staff, and consultant costs, etc.—made clear that she’d forgotten an important step: Leverage current IT infrastructure and resources to reduce cost estimates and make a project more attractive to business executives.
  8. DON’T GET THE BUSINESS TEAM INVOLVED: No one wants to own ROI. Calculating ROI can be difficult; understanding all the required skill and resource components can challenge even the best manager. When the planning phase of a project occurs, most managers take it upon themselves to calculate ROI on their own. It’s important that baseline ROI numbers are adopted by a team and accepted by the key business stakeholders.
  9. DON’T ACCOUNT FOR THE FULL SALES CYCLES: In the B2B buying process, it can take many months for a prospect to go from first touch to closed sale. If you try to calculate your ROI too soon, you may undervalue the amount of impact that investments are making. In the B2C buying process, it may take time to generate awareness, educate consumers and gain trial. But, once you do, buying frequency might increase at that point. Pick a time period to measure your ROI that makes the most of the resources invested.
  10. DON’T ACCOUNT FOR CHANGE: Nothing is certain. You can’t know what competitive developments, new trends or surprises might occur during the measurement period for your ROI. So don’t treat ROI as an area that you “set and forget.” Look at it regularly. Evaluate against KPIs. And be prepared to make revisions as necessary. Anything worth measurement should be view with the most current data.

Do these mistakes help you to understand the correct way to calculating ROI. Does your business need help in doing and managing ROI.

10 experts explain what is a good ROI and why 0

Posted on May 28, 2018 by Rob Petersen

good roi

Good ROI measures the profitability of investments and helps objectively assess future success.

ROI also demonstrates how skilled the people in charge are at generating profitable growth and managing company funds wisely.

What is a good ROI? 10 experts state explain their standards for a range of industries.

  1. Adverstising
  2. Business Owner
  3. Customer Relationship Management (CRM)
  4. Customer Service
  5. Entrepreneur
  6. Investing
  7. Marketing
  8. Digital Marketing
  9. Real Estate
  10. Restaurant
  11. Venture Capital

Here’s what they have to say.

GOOD ROI FOR ADVERTISING (GOOGLE ADWORDS)

“Research show businesses make an average of $2 in revenue for every $1 they spend on AdWords. According to Google, campaigns that use the Conversion Optimizer achieve a 21% increase in conversions while decreasing CPA by 14% on average.” – Elisa Gabbert, Sr. Manager of Content and SEO, WordStream

GOOD ROI FOR A BUSINESS OWNER

“Strive to make at least triple the value of the hard cash you have invested in your business. Average angel investors and venture capital fund investors shoot for a return of 4 to 10 times their invested capital.” – Start on Purpose

GOOD ROI FOR CUSTOMER RELATIONSHIP MANAGEMENT (CRM)

Nucleus Research finds that for every dollar spent on CRM implementation, returns can peak at a stellar $8.71 (2014). That’s a $3.11 jump from three years ago when the strongest returns topped out at $5.60.” – Sarah Brigham, Nutshell

GOOD ROI FOR CUSTOMER SERVICE

“In research on actual customer transactions published in the Harvard Business Review, researchers found that among thousands of customers studied, customers who had the best past experiences spend 140% more compared to those who had the poorest past experience.” – Elen Veenpere, Groove

GOOD ROI FOR AN ENTREPRENEUR

“My advice to entrepreneurs is to try to at least double total invested capital plus the value of any contingent liabilities associated with guaranteeing bank debt, real estate leases and equipment leases. Building a successful business is hard work. Earning a salary is not enough to compensate for all the risks and effort involved with business ownership.” – Susan Schreter, Fox Business

GOOD ROI FOR INVESTING

“A really good return on investment for an active investor is 15% annually. It’s aggressive, but it’s achievable if you put in time to look for bargains. ROI, or Return on Investment, measures the efficiency of an investment. For every dollar you put in, what kind of profit can you expect.You can double your buying power every six years if you make an average return on investment of 12% after taxes and inflation every year.” – Trendshare

GOOD ROI FOR MARKETING

“A good ROI for marketing is 5:1. A 5:1 ratio is middle of the bell curve. A ratio over 5:1 is considered strong for most businesses, and a 10:1 ratio is exceptional. A 2:1 revenue to marketing cost ratio wouldn’t be profitable for many businesses, as the cost to produce or acquire the item being sold (also known as cost-of-goods-sold, or COGS) is about 50% of the sale price. For these businesses, if you spend $100 in marketing to generate $200 in sales, and it costs $100 to make the product being sold, you are breaking even. If all you accomplish with your marketing is break even, you might as well not do it.” – Chris Leone

GOOD ROI FOR DIGITAL MARKETING

“According to Neilsen, the average marketing return on investment is $1.09. A $1.09 ROI means that for every $1 spent, the company generates $2.09 (for a profit of $1.09). The top 3 marketing media with the highest average return on investment are email marketing, search engine optimization, and direct mail. Tracking source of sales to be able to calculate return on investment from your marketing initiatives is critical to being able to improve the effectiveness of your marketing spending.” – Profitworks

GOOD ROI FOR REAL ESTATE

“Without using any debt, real estate return demands from investors mirror those of business ownership and stocks. The real rate of return for good, non-leveraged properties has been roughly 7% after inflation. Since we have gone through decades of 3% inflation, over the past 20 years, that figure seems to have stabilized at 10%.” – Joshua Kennon, Managing Director, Kennon-Green & Co. 

GOOD ROI FOR A RESTAURANT

“If by ROI you mean the profit realized annually by the average restaurant, it is very consistent across the industry: 3–5% according to several sources. Extremely well run restaurants or very high-end places might make as much as 10%, but those are the exceptions — not the norm. I would be very suspect of any restaurant that claims to achieve 15–25% net profits.” – Chuck Rogers, New Orleans Restaurant Owner

GOOD ROI FOR VENTURE CAPITAL

“Venture capital (“VC”) funds, as well as experienced angel investors, specialize in investing in startup and growth-oriented privately held companies. They understand the statistical risks of business failure within their investment portfolio. They know that on average, only four out of 10 investments in promising entrepreneurial companies will deliver any profit to VC fund investors. This is why VCs and angels aim extra high and turn down investment opportunities that don’t represent a “grand slam home run potential” to the overall fund.” Susan Schreter, Fox Business

Do these example help you understand what is a good ROI and why? How is your business measuring up? Or, if you don’t know, do you think it’s worth knowing what is the ROI for your business?

8 surprisingly simple steps to calculate ROI 0

Posted on March 20, 2017 by Rob Petersen

roi

ROI (Return on Investment) is the basis from which informed investment decisions are made.

The ROI formula only requires two numbers; the cost of your venture and the return made from that venture. But there are inputs that go into each. For many, this is where the simple gets complicated. But it doesn’t have to be?

Here are 8 surprisingly simple steps to calculate ROI.

STEP #1: START WITH A BASELINE

roi baseline

Return from a new venture has to first take into account what occurred before. So you have to establish a baseline. In our experience, there are only three baseline scenarios. In Scenario #1,  the venture is just beginning so there is no baseline. There is a clean slate. In Scenario #2, the new venture is trying to change just one area of a company’s operations (e.g. digital, call center, human resources). The baseline in this case is the return in this area from prior period. In scenario #3, the venture involves a change or transformation in the company that likely to impact a number of areas. For example, a business generates revenue through a sales force, call center and website. They are investing in digital operations by upgrading the website, building a mobile app and improving the online selling infrastructure so they can spend less in other areas. In this instance, the baseline is the amount the website generates currently based on a total percent of the company’s operations.

STEP #2: DECIDE IF RETURN IS REVENUE OR PROFITS

roi profit or revenue

Be clear at the outset how you will measure the return in dollars. Is it revenue (sales) or profits? The latter in many cases is the most desirable measure. But it is harder to understand and control. For example, a company produces a food product. Profits requires a knowledge of the cost of goods, shipping and retail allowances. These are often hard to know now and harder to predict in the future. Because revenue has more factor within a company’s control, it is generally easier to forecast. While some insist profits is the way to go, in our experience, revenue is also is a good indication of success and basis for decision making.

STEP #3: DETERMINE THE TIME FRAME

ROI time frame

Before you can determine the return, you have to know how long it is going to take. In most cases, the time frame for ROI is between one and two years. This is due to: 1) Functional activities like the time it takes to create and build new assets (e.g. website, data center and buying infrastructure) and 2) customer uptake for awareness, consideration, trial and repeat purchases. To help understand customer uptake, it helps to know the buying frequency and Annual Customer Value (ACV).

STEP #4: DECIDE INPUTS FOR THE RETURN

roi return

The return is a prediction or forecast of what will occur by the end of the time frame. Use real company data, not norms or averages, unless you want normative or average results. Basics that are usually included in returns are how many new vs repeat customers are expected? What is their Annual Customer Value? If there is a digital component, what are visits and conversions rates to the website? If a company transformation is expected, operating costs in other areas that will decline as new capability are built can be a factor. There can be a few to many input. Confidence in the data means reliability in the return.

STEP #5: IDENTIFY THE INVESTMENTS

roi investments

In some cases, this is self-evident. But not always. Let’s say a major investment in infrastructure is occurring that will take a couple of years but the ROI time frame is one year. The investment is based on cash flow and what is spent in that year.

STEP #6: CALCULATE THE ROI

roi calculation

The ROI formula is: Return – Investment/Investment X 100%. The ROI is expressed as a percent. That’s it. Here is the formula and a sample calculation.

STEP #7: GUIDE WITH KPIs

roi & kpis

An ROI is a forecast of a result to occur in the future, a scorecard of key metrics is developed to keep ROI on track. These are Key Performance Indicators or KPIs.  A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. To keep the ROI on track, KPIs are an actionable scorecard. Variables that figure into the return like returning customers, new customers, annual customer value and conversion rate might also be KPIs. Here is what a KPI scorecard looks like for a new digital marketing venture.

STEP #8: ALIGN WITH DESIRED GOALS

roi & goals

ROI is key to evaluating how realistic is the business objective and financial goals for a company. In the ROI calculation above of 238%, the company is expecting a return of $2.38 for every dollar invested. The company has to decide how if realistic this is. It is if the company has the commitment and deliver on their plan and measure success. It probably isn’t if they don’t. But now they have a basis for evaluation. Otherwise, the company is just guessing.

Do these steps to calculate ROI sound simple and sensible to you? Do you need help figuring out ROI at your company?

10 essential infographics to create a digital marketing plan 0

Posted on August 23, 2015 by Rob Petersen

 

 

Digital Marketing Plan

U.S. advertisers’ spending on digital advertising will overtake TV in 2016 and hit $103 billion in 2019 to represent 36% of all ad spending, according to Forrester’s latest estimates based on its ForecastView model.

That means a lot more businesses are going to be in need of an effective digital marketing plan.

To guide you through the development, here are 10 essential inforgraphics to create a digital marketing plan.

  1. WHAT IS DIGITAL MARKETING? Begin with an understanding of what is digital marketing. Make sure your audience knows what they’re getting. How it works. What are ways to achieve desired results. What tactics are going to be in the plan and what the measurement tools are. This infographic from Pixaal starts you on your way.

what is digital marketing2. TOP 10 DIGITAL BRANDING TRENDS: Account for key developments. Take them into consideration in developing your plan. Know what to be aware of, what to avoid and what to expect. This infographic from the Borenstein Group provides good perspective and context.

Top 10 Trends for a Digital Marketing Plan

3. SEO: EXPLAINED: 54% of people find a website through natural search results according to Forrester. Understand how to reach the majority of people who find your website and attract even more. Search Engine Optimization, the process of maximizing the number of visitors to a particular website by ensuring that the site appears high on the list of results returned by a search engine, is a primary requisite to every digital marketing plan. This infographic from NerdyFace explains what to enable on your site for effective SEO.

seo-explained

4. SEO VS PPC: While 85% of clicks on a search engine page go to an organic search listing, if your site isn’t at a top listing, that click isn’t going to go to your business. PPC (Pay Per Click) allows a web owner a quick way to be listed in a top position by paying for ads. In addition to a high search rank, a PPC campaign is relatively easy to measure and manage through the accessible of measurement like CPC (Cost Per Click), CTR (Click Through Rate) and Conversions. The author of this infographic isn’t identified but has objectively explained the differences and benefits of each.

SEO vs PPC for Digital Marketing Plan

5.  THE ANATOMY OF CONTENT MARKETING: 70% of consumers prefer getting to know a company via articles rather than ads according to kapost. Content Marketing takes many forms and has many benefits. This infographic from Axonn explains the various forms Content Marketing takes, results it produces and why it is so important for effective digital marketing.

Content Marketing for Digital Marketing Plan

6. SOCIAL MEDIA MARKETING: While Content Marketing is the primary ingredient of Social Media Marketing, there is an art and science to effectively using social network to accelerate, amplify and activate your audience. Social Media Marketing is a marketing discipline unto itself in any digital marketing plan. This infographic from Visual.ly created on PiktoChart puts the two in contest and the reasons to devote resources to both.

Social Media Marketing in Digital Marketing Plan

7. MOBILE MARKETING: US adults spent on average 34 hours per month using the mobile internet on smartphones. By comparison, they spend 27 hours on the PC internet. Of that smartphone internet time, apps capture 86 percent of usage. Only 14 percent of smartphone internet access time comes via the mobile web according to Marketing Land. This infographic from Milo shows how much of consumer behavior has gone mobile and the top tactics marketers should pursue.

mobile marketing for digital marketing plan

8.EMAIL BEST PRACTICES: In 2014, email marketing was cited as the most effective digital marketing channel for customer retention in the United States according to the CMO Council. Email marketing requires discipline and steady attention. This infographic from eMerge gives best practice so you can carry on the due diligence that is required for email marketing.

email marketing digital marketing plan

9, MOST IMPORTANT DIGITAL MARKETING METRICS: “If you can’t measure it, you can’t manage it,” said Peter Drucker. This infographic from Digital Marketing Philippines gives you the most important measurements to manage.

what is digital marketing

10. DIGITAL MARKETING ROI: Does digital marketing produce results? Here are 8 studies from an infographic BarnRaisers did for the IAB that proves it does, It also shows digital marketing works best when it is integrated into the overall marketing mix.

digital marketing plan ROI

Do these infographics give you guidance for your digital marketing plan? Do you need help with a digital marketing plan that will build your business?

 

 

 

10 case studies where web analytics insights drove ROI 0

Posted on August 09, 2015 by Rob Petersen

 

 

web analytics

What good is data if you don’t know what to do with it?

Web Analytics is the measurement, collection, analysis and reporting of internet data for the purposes of understanding consumer behavior, improving user experience and optimizing web usage.

This might sound intimidating to some but the reason why companies do web analytics is simple: To find insights that help make better business decisions.

Who does it well?

Here are 10 case studies of companies that used insights from web analytics and drove ROI.

  1. BT FINANCIAL GROUP: Is a leading provider of superannuation, investment and insurance products. The BT website focuses on service and usability with an online application form as one of the key conversion points. Landing pages with different combinations of the design elements for testing are created to optimize the user experience and maximize conversions. With conversion testing, BT increases form completions by more than 60%.
  2. BUILDDIRECT: Does business in more than 100 countries with an expanding portfolio of building materials. Though the company is growing rapidly, management is eager to improve the efficiency of its online spending. Through web analytics, BuildDirect finds home buyers who purchase a sample have a 60% likelihood of returning to the site within the next 30 days and placing a full order,  BuildDirect uses GA’s A/B testing capabilities to perfect its marketing approach. With insights from web analytics, BuildDirect increases sales by 50%.
  3. HARVARD UNIVERSITY: To expand the digital reach of two established schools, Harvard Summer School and Harvard Extension School, Harvard ran a 12-month SEO and PPC campaign. They use web analytics as an audit to identify technical setbacks, content positioning, to create new landing pages for search traffic, and top-of-funnel paid search awareness campaigns. The result are: 1) 89% increase in visits from organic search, 2) 75% increase in registrations from organic search, 3) 30% increase in CTR with AdWords and 4) 124% increase in ROAS with AdWords.
  4. KEEN FOOTWEAR: Is an outdoor shoe manufacturing company based in Portland, Oregon. The company needs a better way to measure, analyze, understand metrics that mattered on their social network provide meaningful insight. A framework involving reach, engagement, influence, sentiment and effect is developed. Key Performance Indicators (KPIs) within each area are established. Using the metrics: 1) Page Likes increase by 92%, 2) Post Reach increase by 342%, 3) Post Engagement increase by 137% and Active Users increase by 213%.
  5. MOTOREASY: Is a company that sells extended auto warranties. Motoreasy’s Web site is re-designed to give you a quote for an extended auto warranty on your car. This involves: 1) Tell people what you want them to do (fill in the form) and 2) tell them the benefits of doing so(you’ll get a quote which could save you money). The telephone number is featured prominently at the top, making it easy for them to call if they found filling out the online form too tedious.  These changes reduce the drop out rate from 65 percent to 29 percent overnight. This increases the completion rate of the sign up page from 31% to 69%.
  6. NIKE GOLF: Is the golf-specific retail branch of Nike. Although there is the benefit of the Nike brand, there is also the lack of a focused keyword strategy on the Nike Golf website. It is very difficult for search engines to crawl for content. Research helps make decisions like whether target keywords should be “golf apparel”, “golf clothing”, “golf clothes” or “golf sportswear.” As a result of the research, Nike Golf sees a 169% in total increase in organic search traffic.
  7. ON THE BEACH: Offers value for money flights and hotels to the world’s most popular beach holiday destinations, providing consumers with a huge selection of travel products, including 50 million airplane seats and more than 30,000 hotels. On the Beach finds that their generic search is undervalued under last click reporting, a discovery that allows the company to build a custom attribution model and increase budget on generic campaigns. This helps drive a higher volume of site traffic, holiday sales and market share in the travel sector, which in turn led to a 25% increase in ROI.
  8. PBS: Helps individual PBS producers and local PBS stations create and promote each section within PBS.org. PBS wants to develop a coordinated approach to analysis and reporting that would inform their future strategic decisions. Analysis of search engine trends leads to an increase in PBS traffic by 30%. Web analytics is set up to allow PBS to evaluate the way users consumed video. As a result, PBS increases both conversions and visits by 30%.
  9. PUMA: Has rich, dynamic web site; but, just as PUMA constantly improves its products, it also believes in making site changes that help visitors easily achieve their goals. While testing its web site header, it finds a variation that increases online orders by 7.1%. Puma more than doubles the amount of time visitors spend interacting with PUMA brand content, such as news, videos, and photos. It results in 47% more traffic.
  10. RYANAIR: Is Europe’s largest low fare airline. 99% of Ryanair’s bookings are made through its website making it the company’s single most important marketing tool. Web Analytics helps understand email and visitor behaviour. Ryanir is able to increase click-through rates by 200%, decrease bounce rate by 18%, increase visitor traffic by 16% to strategic pages and double revenue generated from their email campaigns.

We, at BarnRaisers, are big believers in how data-driven results helps make better business decisions. Helping companies connect the dots between strategy, execution and results is a big part of what we do.

To these case studies help you see how insights from web anlaytics can drive your businsess’ ROI?

 

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