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