ROI Explanation

Return on Investment (ROI) is used by companies to understand the business value of investments and today it is one of the main drivers behind spending money on technology.

ROI is a family of financial measurements known as Net Present Value (NPV), Internal Rate of Return (IRR) and Payback and are all as important as each other.

NPV, IRR and Payback are the primary measures that define the business value of any investment and therefore are key within the financial decision-making process.

The ROI family represents Value (NPV), Rate (IRR) and Time (Payback). Value; how much money they will make on the investment. Rate; the yearly percentage returned on the funds used on the investment. Time; when they will get their initial investment back.

The objective of ROI in the sales process is to quantify and value the benefits rather than minimize the cost.

Clients need ROI based on their own specific circumstances. Industry standard claims irrelevant.

Next: Why use ROI? >>

IRR, NPV and Payback are the three (3) key measures used in the board room to evaluate investment decisions.

Companies and their shareholders are demanding proof that technology investments are impacting the bottom line.

Even if budget has been allocated, the decision-maker has no automatic and irreversible right to spend it. Decisions to invest in technology solutions are competing against demands for funds for marketing, restructuring and sales campaigns.

A jointly sponsored and believable ROI can lead to budgets being freed up and investment spending accelerated.

Next: ROI Calculations >>

IRR: Internal Rate of Return

This is the return per year on the original investment when considering all costs and benefits over the given investment period.

NPV: Net Present Value

The value of the ongoing benefits discounted back to the present year. NPV calculates the profit on the deal (in the client's terms) and recommends whether a project should be undertaken or not.

Payback Period

Payback is the time it takes for benefits generated to recover returns that equal the initial investment.

Next: ROI Fact from Fiction >>

ROI averages don't apply. Joint agreement is necessary between the supplier and customer on the costs and benefits in order to provide a trusted ROI.

ROI is not a game to produce a number. It's about quantifying and substantiating ongoing costs and benefits from a project.

Those working with something else to gain from the project; Those working with something else to gain from the project (e.g. consultants, external analysts) may not objectively assist the sale or provide a rapid evaluation of the proposal.

Next: ROI Example >>

ROI for the super-Fast Boil Kettle

First find out some information about the current situation

• Old kettle takes 3 minutes to boil
• Used 4 times a day
• Employee waits by kettle
• Average cost of employee is £15,000 pa

So what will the super-fast boil kettle cost and how will it benefit the user?

• Cost of new super-fast boil kettle - £45
• Life of super-fast boil kettle - minimum one year
• Time to boil super-fast boil kettle - 1 minute

'That's 8 minutes saved every working day! Equivalent to 29 hrs a year! A saving of £22 per month!'

Put the above information into Shark and get the following ROI results for approval!

• Net Present Value = £206
• Internal Rate of Return = more than 10,000%
• Payback = less than 3 months

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