Digital Investment Series, Part 3: Measurement
Continuing the topic covered in my previous two blogs – When To Invest in Digital Technology, Part 1 and When To Invest in Digital Technology, Part 2 – an important step in the decision process is the evaluation of the financial impact of the investments.
Determine the Return on Investment (ROI)
When faced with a significant investment in our business, understanding the return on investment is critical.
A typical digital investment is made for one of three key reasons:
- Increase sales
- Improve operational efficiency
- Improve customer retention
The trick is making sure that you can directly attribute these improvements to the initial investment and that you already have effective mechanisms in place to track these data points.
Once we identify the total cost of ownership or implementation, we can determine the rate of return on the investment. A simple ROI example is:
You spend $150,000 to have your new website built with an ecommerce component that is new to the business. In the first year, you generate $200,000 in online sales revenue. The ROI is: (200,000 - 150,000)/150,000 = 33.33%. You may have to look at the cumulative ROI when your investment may be realized over a period of time.
What type of return do you expect? Many business owners expect to have a specific profit margin, such as 20% profit on all sales. When we save for retirement, we are thrilled when we see a return of 10% or more. Currently, savings accounts might be returning a .01%. Do you have an expected rate of return on your company investments?
If it is not your normal practice to look at the total rate of return on your technology investments, I encourage you to start simple. As you become more comfortable with the practice in the organization, you can introduce the time value of money and/or the cost of capital.
Digital Transformation Consultation
Will your digital transformation plan for your organization deliver a positive return? Do you need help deciding which investments to tackle first? Schedule your one-hour digital transformation consultation with me today.
Meet the Author: Sheila Burkett
Sheila Burkett, Co-Founder and CEO of Spry Digital, is a networker, mentor, collaborator, philanthropist, and community leader. Her passion is helping women and people of color succeed in technology, in business, and as humans. In every facet of business and community, Sheila is a champion for helping people feel like they belong and can thrive.
She is happily married and a proud mom of three amazing men and two dynamic daughters-in-law. In her spare time, she can be found reading, gardening, and shopping for antiques. Most recently, she has been honored as a 2023 St. Louis Titan 100 and 2022 YWCA Leader of Distinction.