# What is ROI?

Guest Blog: What is ROI?

Have you ever considering measuring and improving your ROI through Customer Experience?

As experts in customer experience, we understand that ROI is essential to every investment a business can make, especially when it comes to marketing and consultancy.

Return on Investment (ROI) is one of the most common profitability ratios, and is used to measure the gain or loss made on an investment, relative to the amount of money that has been invested. The use of ROI in business involves observing how money has been invested in a company and the return that is realised based on the net profit of the business.

How do you calculate ROI?
ROI calculation is based on percentage, as this is how the return on investment is most typically expressed. The most common formula used for working out ROI is:

ROI = (Net Profit/ Cost of Investment) x 100%

This calculation is flexible and can be adjusted for different uses. To give an example of a return on marketing investment, imagine a company that averages 4% organic sales growth and runs a £10,000 campaign for a month. They have a sales growth of £15,000 that month. The calculation would look like this:

Return on Marketing Investment = [(£15,000 – £10,000)/ £10,000)] x 100

= 50%

By using this calculation a business can clearly determine how much return they have gained by their investment of £10,000. In this case, they are £5000 in profit.

What are the benefits of using the ROI formula?
There are some advantages which make ROI percentages useful, as well as the formula used to calculate them. The first of these is that percentages are more often thought of as being easier to read and understand than ratios. The formula is considered extremely easy to calculate as well, because there is no set definition of what “return” signifies and can, therefore, be used as you or the company investing sees fit.

The notion of return on investment is also generally considered to be a universal concept, so if you use this formula, it is most likely that others will know what you are referring to. This will also allow for comparisons between investing in a new office, or if a new member joins your team.

What is a good ROI?
What determines a good ROI depends on what a company is investing, and how that company interprets its returns. As the formula for calculating ROI is flexible, there is the possibility for it to be easily manipulated to suit any company’s particular requirements. Because of this, you may find that results vary between the results found for your company and those found for other firms. When you are comparing the efficiency of an investment, it is important that the same inputs are used to get an accurate determination of your ROI.

In theory, any return on investment that results in a profit is good, but how much profit is required to consider the investment success would depend on the business and the circumstances involved.

A number of factors can affect and even completely determine the results of your return on investment. The largest of these is market share, because the higher the share of the market, the higher your profit margin tends to be.

As an average, companies which have a market share above 36% earn more than three times as much as businesses with less than a 7% share of their market. At least three contributing factors come from high market share; economies of scale, market power and better access to quality management and talent. The latter can increase your ROI as high performing managers are most often successful at achieving large portions of their respective markets.

The second-largest factor that will determine your company’s ROI is the quality of your product or service. When customers are satisfied with what is being provided, they are more likely to return and use your company again. The ideal outcome is for a company to have both a high market share and to supply a superior product or service.

How R&D (Research & Development) Affects ROI
R&D spending can also affect the ROI of a firm. When market share is high, a company’s average ROI will be highest when its R&D spending is also high. There are several hypotheses as to why this is the case, though it is most likely that having a high ROI will encourage a company to invest more in R&D and when this has a positive impact, it helps to improve the return on investments.

How Inorganic Growth Affects ROI
The newest factor, which often needs careful monitoring, is the notion of increasing ROI through inorganic growth, otherwise known as a merger or acquisition. When this is done correctly, the acquisition should increase both your market share and your ROI, as you will immediately gain the customers and sales of the acquired business. For example, when Google bought YouTube in 2006, the company immediately made gains from the website and its existing userbase and went to the top of the online video streaming market.

Improving your return on investments can be achieved in several ways, from generating more sales to raising prices. Also, improving your overall customer experience can go a long way to increase your ROI on any investment your business may need to make to increase sales.

When you choose to begin a plan for improving your company’s ROI, it is important you have clearly defined outcomes you wish to reach first. It is also recommended that there are milestone goals in place, in order to help you increase the payback on the different initiatives you have set up and to keep you working towards the end result you have planned.

How Improving Customer Experience Can Offer a Great ROI