## How to determine the ROI on your product investment

Vanessa B  08/Aug/15  no responses.

#### Calculate your potential Return on Investment on a Product before investing

If you are in business then the likelihood that you will be approached with investment opportunities is great. Some ideas appear to be very lucrative and others less so. However, there must be a way in which businesses can calculate whether or not a product is worth investing in. There is. Return on Investment analysis or ROI is commonly used by financial investors to advise companies where money should be allocated. The procedure is rather simple.

First determine how much the products initial investment will cost

The first part of the ROI calculation is to determine the initial investment cost. This is NOT the price of the product but the accumulative finances which will be necessary to get the product up and going. For example: If you purchase a product for £5000 and it costs you another 1k to get the product installed and then 40 work hours (at an averaged £9.25 per hour) then your initial investment part of the formula would look like this.

Initial investment = 5000 + 1000 + (40*9.25)

Initial Investment = 6000 + 370

Initial Investment =£6370

It is critical that you calculate the total investment cost and not the product cost. Many times businesses miscalculate their ROI because they forget that a product will take other costs to get it up and operational. For example: if you are purchasing a product for a low £25 a piece, you need to calculate how much the bulk rate is, promotional costs, training and setup.

If payouts are spanned out of several years you need to adjust your investment per year. For example: If you still require the 40 hours of training and it costs 1000 to upkeep and maintain the product your investment after the first year would be £1370.

How much do you want to make from the product?

The next step in determining the ROI is to ask yourself “What do I expect to get back on this investment?”. If the person selling you the product promises that you can double your investment then you would set your payback at £12,740. Now, here is where a wrench is thrown into this part of the formula. If you are expecting to double your money in a year, then leave the payback as it is. However, if your investment will return your money in say 5 years, then you would divide your payback by that amount of time to get your yearly payback.

Payback over a 5 year period to double your investment = 12740/5

Payback = £2548 per year

Determine your ROI per year percentage

The whole purpose of the ROI is to determine if you are making a smart investment. If the percentage is under 50% then the product is not giving you an adequate ROI. Percentages which are over 50% are desirable. However, most companies want their ROI to be in the 70%-80% investment area (though this may be a bit idealistic).

Here is the formula:

Return on Investment = [(Payback-investment)/Investment)]*100

If we use the Investment and Payback from earlier the formula will look like this:

ROI = [(2548-6370)/6370]*100

ROI=[-3,822)/6370]*100

RIO = -.6*100

ROI= -60% for the first year

For the second year through the fifth year your initial £5000 would not be part of the formula but just the investment to train and maintain. Your ROI will drastically change.

ROI=[(2548-1370)/1370]*100

ROI=(1178/1370)*100

ROI=.859854*100

RIO=86% for year 2 to 5