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Understanding Return on Investment

In this article, you will discover how to implement a return on investment formula, when to use it and how to make more money with your ROI formula.

ROI means “Return on Investment.” Understanding ROI is one of the basics of running a business. Understanding a basic return on investment formula can help your best utilize your marketing dollars.

Why a Return on Investment Formula Matters

Here are examples of how you may want to spend some of your private practice money:

  • Google Adwords
  • A local newspaper advertising
  • Sponsor for an event, like TEDx or a golf outing
  • Paying for a private practice coach
  • Going to a conference
  • Attending an e-course

Having a return on investment formula can help you make decisions on what will work and what won’t with your hard earned money. 

You’ve probably heard how the people that made money during the gold rush weren’t the gold seekers, but those selling tools. That is often the case in the internet and business world as well. Those that teach can often make more than those that are doing the actual work. So it is essential that you discover how to decipher the best ROI. 

Figure Out the Worth of a New Client

I know this sounds weird. I’m not saying that your clients are each inherently worth more, but rather that we can determine the financial expectations of a new client.

These are your first steps in your return on investment formula:

  • Pull your financials for the past six months. These should have your income, total sessions, and expenses.
  • How long did your average client see you? Figure out the average. There are clients that see you once, another may come 20 times and others may see you six times. Add up the total sessions and divide by the total clients.
  • How much does each person pay? Imagine that each person sees you six times and you charge $175, then they are “worth” $1,050.

Determine the Cost of Each Client

The basics of determining the worth are fairly straight forward. 

  • Add up all your expenses for a month: rent, marketing, website, office supplies, etc.
  • Divide this amount by the number of sessions you have per month.

Example: Your expenses for the month are $2,000 and you see 10 people per week. So you have 40 sessions per month. $2,000 divided by 40 = $50 cost per client. 

When you are figuring out your return on investment formula, you may want to change numbers to see how they change the ROI. For example, if you see more people or raise your prices, the return on investment formula changes.

What’s the Return on Investment Formula for Products?

Up until now, I have shared the return on investment formula for a client-based business. That model is based on one hour of time equaling a specific amount of client time. In a consulting practice or counseling practice, this return on investment formula makes sense.

As counselors or consultants start to expand their businesses they begin to add:

  • Passive income streams
  • E-products like e-courses or Mastermind Groups
  •  Additional employees or contracts

The same return on investment formula still applies:

  1. How much is the investment?
  2. How much is the product?
  3. Divide it to discover your Return On Investment.

Here’s a case study:

Jane is launching an e-course. She’s going to invest in LeadPages, Zippy Courses, a new DSLR camera, a lav microphone, and screen recording software. The total cost of her equipment is $800. 

Jane decides to do some Facebook advertising for a webinar as a lead magnet for her new e-course. She pays $400 for highly targeted marketing. 

Her total investment is $1,200. 

However, she also spent 20 hours planning, recording and implementing her course. She’s a counselor that charges $150 per session, so her opportunity cost is $3,000. So she wants to figure out the return on investment formula for the $4,200 in time and equipment. 

Let’s play with some of her numbers:

  • If she charges $495 per person, she will need nine people to break even
  • If she charges $995, she will need five people

Creating Your Own Return on Investment Formula

We each have different reasons we want a return on investment formula. In creating yours, make sure you determine all of your costs, your investment in marketing or consulting and your expected client engagement. 

Calculator photo available from Shutterstock

Understanding Return on Investment

Joseph R. Sanok, MA, LLP, LPC, NCC

Joseph Sanok

Joseph R. Sanok, MA, LLP, LPC, NCC teaches consultants how to become better consultants through his website www.BecomeaConsultantToday.com. Joe also helps counselors with growing private practices through his website www.PracticeofthePractice.com. He also loves sailing and playing with his two daughters.

 

APA Reference
Sanok, J. (2015). Understanding Return on Investment. Psych Central. Retrieved on November 11, 2018, from https://pro.psychcentral.com/understanding-return-on-investment/

 

Scientifically Reviewed
Last updated: 2 Jul 2015
Last reviewed: By John M. Grohol, Psy.D. on 2 Jul 2015
Published on PsychCentral.com. All rights reserved.