Difficulty of Calculating Real ROI

What is ROI?

ROI is an abbreviation for return on investment. When a company invests resources for a business process, the company should expect some return. For example, when a company decides to invest in advertisement, the company pays for advertising media and also the company will pay to create advertisement. If a company is investing in listing advertisements and if one of employees worked to create texts for listing advertisements, the salary for that employee is also a part of investment. In return, most of the time the company would expect profit. And, the percentage of profit over total cost of investment is the return on investment.

As a company as a whole, all the expenses can be seen as investment and profit will be shown in the financial statement so that it is easily calculated. However, if a manager of a team wants to know the ROI of each project in a company, calculation becomes difficult.

Difficulty of calculating real ROI

If it is like an investment in the stock market, it is clear to see the ROI. Amount of money spent to buy the stock is clear and the amount of money returned from selling stock is clear. Therefore, ROI is easily calculated. However, if we try to calculate ROI for the business, it will not be easy. Usually, the profit or the sales growth will be the key metric to see the return on investment. But, no company will invest only in one thing each time to grow sales. The company will challenge many different things to grow sales so that sales would become the result of compound causes. And, this will make it difficult to distinguish which investment worked to grow sales.

In addition, if an employee is dedicated to one project to gain some return, it is easier to calculate the cost of investment. But, if an employee is working for several different projects at the same time, it is difficult to know how much time that employee spent for each project.

See the trend not the value

If it is difficult to calculate the exact value of ROI, how should we know the effectiveness of ROI? Even if the value is not precise and accurate, we still can see the trend of the metrics. By comparing the changes of ROI metrics by each period, it is possible to compare the effectiveness of ROI.

Therefore, to evaluate the ROI in which cost calculation is complex, focusing on value itself is not that important because cost might not be accurate. However, by using the same metrics to measure the ROI for a certain period of time, and by watching the trend of those metrics, we can see whether ROI is getting better or not.

One of the key points to grow a business is to challenge many different kinds of methods and find out the effective way. In order to do so, rather than predicting the value of ROI, setting key metrics to measure effectiveness and just try for several times would be quicker to make an action and should provide more learnings in a short period of time.

In our corporate culture called HENNGE Way, there is the one stating "Ignite Changes to Learn from Mistakes Early". This also applies to how we see ROI. To have more actions to ignite changes, our way is to invest first (usually starting small) and see how it goes. If we see metrics of ROI is good, we will continue doing it. But, if ROI is not good, we can say that investment was a mistake. Then, we will try to figure out the reason and try to learn from that mistake.