Oct 6, 2021
In the traditional sense of the term, a return on investment means exactly what it sounds like. It’s a return that investors expect on the investments they make. For years, the metric has been used to analyze how profitable an investment is.
Most businesses around the globe use ROI as an integral metric to analyze the efficiency of an investment over time and decipher whether the strategy behind the decision was productive. Using these findings, businesses can make a decision on whether to follow the same investment strategy in the future and/or compare different options to determine the best one.
In terms of putting a numerical value on it, ROI can be calculated by taking the difference between the current value of the investment and the cost of the investment, and dividing that value by the cost of the investment. Needless to say, the higher the number, the better the ROI.
Truth be told, a good ROI for a firm would be to ensure that their clients make a profit. That’s it. Apart from that, there is no correct answer. Some firms might be content with a 5% ROI, while others might be on the lookout for a higher number like 20%.
In reality, there is no set value or percentage that firms can (or more importantly should) guarantee their clients. They do, however, need to keep track of some important factors before estimating the ROI for their clients. Factors that they might either forget or miss looking at.
Don’t Forget Your Taxes
Picture this. It’s Black Friday and you’ve been standing in line at the electronic store for two hours waiting for it to open. You know that the new LED 4K smart television is going to be on sale. It has ultra HD display, Wi-Fi connectivity, and those pristine curved edges that make your heart skip a beat.
The retail price is close to $800, but the special sale price of $200 is what inspired you to wake up at 3am, drive for 20 minutes, and wait in line until the pigs start flying. You even have the money ready in cash so that you don’t waste time and can get away from the chaos as soon as possible. You check your top pocket and see those two crisp $100 bills. Leaving your cards behind was a wise move since you would have less things to worry about.
The door finally open and a crowd of people that have been waiting with you start gushing towards the television section. But you’re on top of this. You know exactly where to go and what to do. You quickly pick up one of the televisions and place it in your cart. As you head towards the cashier, you overhear people showing discontentment about how all the televisions were taken away in record time. A smile comes across your face and you feel proud.
“That will be $222. Would you be paying by cash or card?” asks the cashier. Wait a minute, what just happened? Your bubble bursts and you realize that you forgot to incorporate taxes. Ugh!
Don’t you hate it when you forget to take taxes into consideration and end up getting the wind taken out of your sails? Unfortunately, that’s what many firms forget as well. Not thinking about the taxes can have a drastic impact on the estimated ROI and lead to businesses losing out on profits.
As the old saying goes, if there were three things that were inevitable in life, death and taxes would take up the first two spots. Therefore, while estimating the ROI, it is imperative that staffing firms always incorporate the taxes that they would have to pay on the profits they make.
Time is Money
While time might be the perfect remedy to heal a broken heart, when it comes to investments time can be your worst enemy. Let’s take a look at an example to understand this factor better.
Imagine your agency is given an option to double the value of your investment and thereby generate an ROI of 100%. Will you take it? Of course you will. Only a fool would pass up such an opportunity.
Now, what if we tell you that you would only be able to double your value after a span of five years? Does that change your answer? Maybe. But, what if it would take you 100 years to get that 100% ROI? Does the offer still sound exciting? Probably not.
Time is of the utmost essence when it comes to investments. What agencies must keep in mind is that the longer they plan to invest money in a project, the higher their return expectations should be.
Furthermore, another disadvantage with time is how it combines with other factors to produce horrible concoctions. For instance, adding inflation with time is as bad as dipping french fries in apple sauce. While the idea might intrigue you, in reality the combination is a horrible idea.
Know Your Opportunity Costs
Have you ever found yourself in one of those tense situations where you’re battling your instincts to make a decision? How about at the grocery store when you have to choose a cashier line? While the current line that you’re standing in has just one person in front of you, the number of items in their shopping cart is colossal. The line next to you has several people in it, but they each have just a handful of items. Which line would you choose, and why?
Similarly, it can be very challenging for an agency when it comes to making a decision about an investment. Would the business be better off with investment A or investment B? What about investment C? Investment D promises good returns, but investment E means a quicker payout.
One can weigh the pros and cons and look at the historical data, but in the end what matters is the cost of opportunity. What an agency is willing to sacrifice, as opposed to what it would gain elsewhere is one of the most crucial factors that it must consider while making these decisions.
Just like at the grocery when you dive deep into your subconscious and start wondering whether the line you joined will suddenly start moving faster once you leave it, agencies too need to think about what they would do with the money if they decide not to make a specific investment.
But don’t beat yourself up too much about it. In addition to a well-thought out investment strategy, the ROI can depend a lot on luck and other external factors as well. Ever heard of Murphy’s Law?
Having one quality customer, who can help improve the customer journey process for your business, is better than having 20 people who sign up as customers and do nothing. Investing in something that leads to a quality customer helping your business increase awareness, improve findability, and build a reputation, as well as becoming an advocate for the business, is the ROI that agencies must aim for.
Therefore, when it comes to ROI what matters is not how much you get back, but what you get back. Apart from making a profit on your investment, there can be no dollar amount or percentage value that can justify the ROI for an agency.
What is certain, however, is that agencies must always strive to increase their ROI. They must think about the factors that affect the return on investment, and reduce their costs as much as possible to increase the profitability of their business.