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Return on investment.

Reasonable Return Expectations Can Help Avoid Too Much Risk

Randy Duermyer Updated July 23, Return on investment, or ROI, represents the financial benefit received from a particular business investment. In other words, it measures what you get back compared to what you put in.

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Learn how to calculate return on investment, why it is important, and the challenges you may encounter when trying to determine ROI. Return on investment measures how effective your investments into your business are at generating income.

No investment is worth the risk unless you get a return. But what is a good return on investment?

Whenever you invest money or time into your business, you need to have a goal result in mind and way to measure it to ensure you're making a profit. Calculating the return on investment is a way to measure whether a business decision is paying off. It's a way of asking, "What will I earn by investing this time and money into my business? For every dollar you spend on a VA, what extra returns in income are you getting?

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ROI isn't static, and many variables can change it. Therefore, you want to calculate ROI regularly and make changes to your return on investment as needed.

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ROI is usually represented as a ratio or percentage and is obtained by dividing the gain or net benefits earned from the investment by the cost of the investment. In other words, for every dollar you spent on PPC ads, you saw a dollar in profit.

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  • Because ROI is measured as a percentage, it can be easily compared with returns from other investments, allowing one to measure a variety of types of investments against one another.

In other words, for every dollar spent on this PPC campaign, you'd see 20 cents in profit. You should consider the ROI of any expense you have. How much will a new, faster computer contribute to your business?

Does the money you spend on a virtual assistant lead to your ability to earn more than if you didn't have her? Figuring out the return of business decisions like these help you to choose investments that help your bottom line. Knowing your returns on the investment of your time, you can make changes to your business model that allow you to earn greater revenue in less time. Note also that ROI isn't the same as profit.

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You determine profit by subtracting your expenses from your income. ROI measures the effectiveness of each of those investments, expressed as a ratio or percentage—not a simple dollar amount.

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Facebook offers insights and many social media management tools also provide analytics. Even then, it can be difficult to know if clicks from social media led to sales.

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Further, in most cases, customers and clients don't spend money on return on investment first encounter with you. Perhaps they find you through a PPC ad, then they follow you on social media and sign up for your email list, and then they buy.

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The question is, which led to the sale? You could argue the PPC did because it introduced the prospect to you, but it's possible a social media post or email led to the actual sale. If you engage in a free promotional activity that results in increased sales, the denominator in your ROI calculation would be zero, which results in a mathematical error. Normally, a zero ROI is bad, but in this case, it's good.

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You made money without spending money. Free marketing often involves the personal investment of time, which does have a financial value, and you can use that to determine ROI. Key Takeaways ROI stands for return on investment. It is a measure of how much financial benefit you have received from a particular investment in your business.

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To calculate ROI, divide the net benefit of an investment by the cost of the investment. It return on investment be difficult sometimes to determine ROI because it can be tough to track exactly how much you received from a particular investment such as social media marketing.