Thursday, June 30, 2011

What you need to know about ROI

ROI is one of those terms thrown around that few people understand, but you can remember hearing it so you know you should know about it, right? Return on Investment, or ROI, is simply a measurement tool, but one I consider a cornerstone measurement tool. Your most valuable assets whether you are starting a business or running one are time and money. As an entrepreneur, you've no doubt run short on both time and money at some point, a lot of clients I meet are in a sort of perpetual state of being short on both time and money.

ROI is a tool that gives you a way to look at the ways you are spending your time and money and give you an objective look so you can evaluate what makes the most sense. Should you start a new ad campaign on Facebook? Should you sell your product on That new idea you've got, should you spend 100+ hours of your time to get it to the surface? As an entrepreneur, these questions are often answered with passion instead of objectivity. Passion isn't all bad, but often it can blind us and we don't realize our mistakes until we've sunk too much time and money in the process. ROI helps temper passion and let you look at an investment at least somewhat objectively.

I read a great discussion lately about cost-per-click advertising, or CPC. We've all been to those sites where there are small ad boxes or Facebook with the ads on the right side of the screen. It seems like everyone is trying to monetize their site or blog lately. CPC is buying advertising through Google or Facebook (or many others) where you only pay if someone clicks on the little ad to go to your site. There is a tremendous trove of information on the internet about CPC. Most, however, deals with getting the lowest CPC or not paying over a certain amount for a CPC or a CPC campaign. What is typically left out of the equation is ROI.

Let's look at two products. Product 1 can advertise with a CPC of $1.25, gets 100 clicks on average and a conversion rate (people buy the product) of 25. Product 2's CPC is $10.00, gets total clicks of 75 and a conversion rate of only 3. Which campaign would you choose? Would you ever pay $10.00 per click? Let's look at the rest of the info...

Now which product would you move forward with? The picture is a lot more clear when you look at the return you anticipate. Of course, this oversimplifies things for the sake of explanation, but hopefully you get the idea. Many people (and many experts) would say you are crazy to pay $10.00 per click to get fewer clicks and few conversions. That's good for you and me, less competition for our profitable products. We'll let them sell unprofitable products all day long. You and I can use ROI to see $10.00 per click, in this case, makes a lot of sense.

That sort of just scratches the surface on ROI, but hopefully you can see it is not some mysterious financial term as much as it is just another tool you should have in your toolbox. I'll be returning to ROI frequently since it is such an important tool. In the meantime, if you've got questions, shoot me an e-mail.