Return on investment (ROI) is a term you can seemingly never escape. Almost always ROI refers to financial return on financial investment. Without doubt ROI is a key indicator of the value of any investment. However, there are some cases where an investment can have intangible returns.

How do you measure the return of buying a meal for someone who has gone without? One could look at such a scenario and discover that for every six meals you buy for the hungry one of those people is able to get back on their feet and feed someone else in return. Whatever the actual return of this investment there will always remain an intangible value to feeding the hungry.

Let’s look at a business oriented scenario.

Suppose you spend $100 advertising your lunch special at your café. Now suppose your lunch special sales increase by 5 a day for 10 days and your profit margin is $1 per special. 5 specials per day times 10 days times $1 equals a return of $50. Was the initial $100 worth the investment? If we leave out some of the more intangible returns then no it was not worth the investment. Consider the following intangible returns.

• Increased brand recognition. The number of people who saw your ad.
• The number of people who came to the café because of the advertising but ordered something other than the lunch special.
• The number of people who are new customers and may become repeat customers.
• How many people who tried the lunch special told their friends or co-workers about it?

Over a period of time, many of the intangible returns listed above could be assigned values and worked into the ROI equation. However even in this simple scenario there remains a measure of intangibleness.

What then do we make of more complex situations? Here are a few guidelines to assist you when calculating ROI in complex situations:

• Breakdown your ROI calculation into categories and assign each item a level of certainty. This way you can calculate an overall ROI with a plus or minus value depending on the certainty.
• If you cannot assign something a value do not leave it out. Make a note stating that this ROI calculation does not include the following things.
• Look at ROI at different points in time. Consider the difference of the return now and in five years.
• Establish a baseline so that you can compare future results with where you are now.

A warning: Intangibles should not be used as an excuse to avoid measurement and therefore accountability.

This entry was posted on Thursday, November 8th, 2007 at 1:44 am and is filed under Innovation Concepts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.