A Tired Mom’s Guide to ROI
There are a variety of ROI (Return on Investment) measures that can help business owners make more confident decisions:
ROAS: Return on Advertising Spend
ROI: Return on Investment
ROL: Return on Labor
ROT: Return on Rime
Neat trick for new business owners: pick one ROI metric and learn how to use it to optimize your business.
If you hear the term ROI and get a little dizzy trying to do math in your head - maybe this will help:
I have 2 kids (6 and almost 3). My kids love toys. I haven’t met a kid who doesn't, but I’m sure one exists. My kids always beg for new toys when we go to a store. Sometimes I give in, and sometimes I don't. When I do give in, I tend to do some math in my head that looks like this:
If this toy costs $5 and it gets played with for 5 minutes, that costs me $1 per minute
If I spend $50 on a toy and it gets played with for 120 minutes, that costs me $0.42 per minute
If I spend $15 at the dollar store and I get 3 hours of quiet…. Is that worth the investment?
And then, when we get home, I evaluate how accurate I am. There are times I have spent $15 on crafts at the dollar store that were used over a few weeks, or in one case, my daughter spent 6 hours building something in her room - well worth the investment!
Other times, I may spend $8 on a $2 toy that breaks before we get home.
Slowly, I’ve built a (FAKE) database in my head and have started making way better decisions than when my youngest was 2 and I was learning.
This is how you apply ROI to your business.
Let’s go through how you can use each one for your business:
ROAS (Return on Advertising Spend):
ROAS = Revenue from Advertising / Cost of Advertising
ROAS is a marketing metric that measures the revenue generated for every dollar spent on advertising. This is a KEY KPI for businesses using paid advertising.
ROI (Return on Investment):
ROI = (Net Profit / Cost of Investment) * 100
ROI is a financial metric that evaluates the profitability of an investment. It compares the net profit of an investment to its initial cost, expressing the result as a percentage. A positive ROI indicates a profitable investment.
This is helpful when you take a $X and use it further for your business. For example, spending $10K on a new website will lead to $20K in net profit, which is an ROI 2x your investment.
ROL (Return on Labor):
ROL = Revenue from Labor / Cost of Labor
ROL measures the efficiency of labor in generating revenue. It evaluates the return generated for every dollar spent on labor. This metric is often used to assess the productivity and effectiveness of a workforce to the costs associated with their labor.
This is helpful for any business with labor tied to revenue-producing activities. Professional services, warehouses, manufacturing, etc.
ROT (Return on Time):
ROT = Value Created / Time Invested
ROT assesses the efficiency and effectiveness of time spent on a particular activity. It measures the value or outcomes achieved relative to the time invested. This metric is often used in personal productivity assessments or project management to evaluate the time-to-value ratio.
This is incredibly helpful for CEOs to measure how effectively their time is spent. This keeps them focused on working towards the $1000 tasks and delegating the $100 and $10 tasks.
There are two types of spend and activities in your business: revenue-driving and non-revenue-driving. Non-revenue-driving activities need to be eliminated or only exist to protect the revenue-driving activities (i.e., insurance and legal fees). ROI, ROAS, ROL, and ROT are all metrics that can help you divide out these activities and help you spend money in the right places.
