What is ROI?
ROI stands for Return On Investment. It is the return or benefit divided by the cost of the investment, expressed as a percentage. The idea being that it creates a level playing field for comparing various investments using the same ratio method.
How does it work?
The calculation is simple and easy to apply to any investment:
For example, at the start of this year, Susan invested $2,000 into a marketing campaign. The result was that she achieved total sales directly from the campaign of $2,500, so;
At the same time, Darren in his own practice undertook a similar exercise of investing $2,000 in a marketing campaign that generated $1,800 in sales. So:
Darren’s experience is in this case a negative ROI.
What is good about ROI as a measure?
The main benefit is that you can apply the calculation to all investment types. If you undertake an advertising campaign per the above examples you can use ROI to measure the effectiveness. If you sublet a room in your practice you can use the ROI calculation to compare what your return might be if you were conducting client sessions from that room instead.
The process of ROI calculation levels the assessment playing field and gives you a universal measuring system for the return you achieve from each dollar invested.
What are the limitations of ROI as a measure?
Up to this point using ROI as a performance measure seems pretty fool proof. However, there are some limitations to be mindful of and these examples will give us some points to consider in this regard:
Jenny invested $120,000 in a part share of a house 3 years ago. She recently sold her share $200,000. Her ROI is:
Andy invested the same $120,000 in a share of the same house and sold it after 12 months for $150,000. His ROI was:
On the surface, Jenny had a greatly higher ROI than Andy. However, the two main limitations in the equation are time and opportunity cost. While Jenny achieved a stronger return, her money was unavailable for other uses for three years (opportunity cost). Andy had a lower ROI but was able to invest the positive return into other things that potentially yield a higher overall return if comparing the same full three-year period.
One way of keeping the playing field level is to annualise the return. Andy held his investment for 1 year, so his average annual investment 25%. If we annualise the investment ROI for Jenny (achieved over three years) her annual return was 66% / 3 making it 22%. So, on a “like for like” basis, Andy had an ROI that outperformed that of Jenny.
How to use this in an allied health practice
Now the method of calculating ROI is understood it is helpful to know where it could be applied within an allied health practice. You might use it to compare effectiveness of various advertising campaigns, client session types, contractor performance or even return on rental investment or return on rental space allocated.