ROI and Uncertainty
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Transcript of ROI and Uncertainty
ROI and Uncertainty
How to estimate a return on investment when you don’t have hard numbers
Charles Funk. Director of Product Management. MediaVantage. CNW
Third Tuesday Toronto – Measurement Matters (#ttmm)
28-Sep-2010
Be clear on your objectives
Two main points
Estimating ROI is better than ignoring it!
• ROI is not everything – but it’s how your CFO thinks
• Thinking through costs and benefits is a valuable exercise
ROI estimates can be refined and validated
• Try worst case, best case
• Understand expected bounds
Investment Scenario
Hire a Social Media Community Manager
• Expected Costs: $100,000 / yr
- Salary and Benefits, Workstation, etc: $75,000
- Monitoring Software: $15,000
- Training and Consulting: $10,000
• Expected Benefits: $ ???
Investment Scenario
Investment Scenario
Investment Scenario
Hire a Social Media Community Manager
• Expected Costs: $100,000 / yr
- Salary and Benefits, Workstation, etc: $75,000
- Monitoring Software: $15,000
- Training and Consulting: $10,000
• Expected Benefits: $ ???
- Greater customer loyalty
- Greater insight into customer issues
- Greater on-line presence, awareness, cool factor
Estimating Quantifiable Benefits
Loyalty & Insight – 20% improvement in retention
• 8 retained customers at average $25k per year
• $200,000 in additional revenue
• $100,000 in incremental profit
On-line Presence – 5% more leads (100 leads)
• 10 leads per qualified prospect
• 4 prospects per deal – average deal $25k
• $100,000 in additional revenue
• $50,000 in incremental profit
Return on Investment
ROI = (Benefits – Costs) / Costs
• Benefits = Gain from Investment
• Costs = Cost of Investment
Social Media Community Manager
ROI = ($150,000 - $100,000) / $100,000 = 50%
Sensitivity Analysis
Investment Scenario Continued:
• Costs with estimated probability
- Expected: $100,000 – 50%
- Worst Case: $110,000 – 20%
- Best Case: $85,000 – 30%
$100,000$85,000 $110,000
Costs
Sensitivity Analysis
Investment Scenario Continued:
• Benefits with estimated probability
- Expected: $150,000 – 50%
- Worst Case: $50,000 – 30%
- Best Case: $250,000 – 20%
$150,000$50,000 $250,000
Benefits
Return under expected/worst/best Scenarios
Expected Return: 50%
• Worst Return: -55% Best Return: 194%
ROI based on expected/worst/best Probabilities
Expected Costs
50% of $100,000 + 20% of $110,000 + 30% of 85,000
= $97,500
Expected Benefits
50% of $150,000 + 30% of $50,000 + 20% of $250,000
= $140,000
Expected ROI (based on probabilities)
ROI = ($140,000 - $97,500) / $97,500 = 43.6%
In Summary
Think through costs and benefits
Try to tie benefits to financial outcomes
Estimate ROI even when you don’t have hard numbers
Try best and worst case scenarios to determine bounds