Why Bother with ROI?

(Please note the tongue in cheek tone!)

It amazes me how so many companies put plans and initiatives in motion without performing perhaps the most important task of the project – calculating return on investment (ROI).

Put simply, ROI (Return on Investment) measures the net income a company is able to earn with its total assets and is calculated by dividing net profits after taxes by total assets. Determining ROI for various projects can be very difficult and time consuming; especially projects where quantifying the benefit is extremely difficult. Establishing values for costs, savings, strategic benefits and risks can be a very arduous task. Yet if properly conducted, determining the ROI on projects allows the project managers to move forward aware of the contributions specific projects or initiatives have to the organization and provides confidence and reassurance to senior management.

So, if ROI accomplishes all of this why do so many managers place such a low importance on it? ROI is the compass for your future success.

For example, let’s say you are a marketing manager, how can you spend thousands of dollars in advertising on radio or in publications or on the internet without a plan to understand whether or not the advertising is even working? Sure you are broadcasting your name and message to a large pool of people, but are those people your target market? And if they are, what actions are you asking them to take? And if they take those actions, how will you know?

If you don’t care about knowing the answers to those questions, then you are right – ROI is not important. It takes too much time to determine, which even further deteriorates the ROI itself. But you will find that not considering the ROI will make it very difficult to get your ad purchase renewed by the senior management if you can’t tell them exactly how the previous year performed.

Some of you reading may be thinking to yourself, “it is 2009; nobody dismisses tracking and evaluating anymore!” I beg to differ. According to a study conducted by Clickable, Incorporated in November 2008, “over 50% of small and midsize businesses fail to properly track successes or conversions.” Also, in a different study produced by CMO Council in January 2009, “38% of marketing executives participating said their companies have no programs in place to track or propagate positive word of mouth among customers.”

So I guess ROI is really no big deal. Here we are nearing the second decade of this millennium, and still 50% of small and midsized businesses neglect to do any tracking or evaluating.

I guess one good thing comes of this - it does shed some light on why 80% of small businesses fail each year.

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