If you want to run a successful business then metrics are everything. And in a physical product business, one of the crucial metrics to consider is Return On Investment. In this video, I’m going to show you just how crucial it is, how to calculate it, and how to improve it.
In the business world, profit margins are discussed ad infinitum. 30%, 40%... opinions differ on the Holy Grail, but one thing is for sure - we need to be making profit.
However, equally as important as a solid profit margin - in my humble opinion - is a strong return on investment. Return on investment, often referred to as ROI, can easily be overlooked when running the numbers on a potential product. But as I’m going to show you right now, the impact of ROI is exponential.
The reason ROI is crucial, beyond just the very fact that it is giving you a return on something of value you are investing, is because it represents speed.
The bigger return you can get on your initial investment, the more you can re-invest in each cycle of investment.
Let’s take a look at the numbers to see how much of an impact a changing ROI makes.
You’ll see by investing £5,000 at 100% ROI, after 6 investment cycles you’d be looking at a total of a little over £300k. Of course this is making a lot of assumptions, drastically simplifying things and not taking into account many factors… but for illustrative purposes, let’s compare that to a higher ROI.
See how, when investing in products that generate a 200% ROI it MASSIVELY changes the long term picture. What was £300k becomes £3m. That’s a 10x change from a 2x ROI due to the compounding nature of growth.
As I said, many many other factors come into play, I merely want to illustrate why ROI is so crucial.
If you are wondering how to calculate ROI - it’s simply profit divided by investment x 100.
For instance, if I sell a product for £20 and make an £8 profit and my total landed cost (meaning all my expenses to get this product landed in a warehouse to be sold - production, shipping, import taxes, etc.) were £4 my ROI would be 200%.
Profit (8) / Investment (4) = 2 *100 = 200%.
You can calculate these numbers, along with others quickly by either installing the Helium10 chrome extension, or using my free spreadsheet which I’ll show you how to grab in a minute.
When it comes to improving ROI you’ve got 3 avenues:
Negotiate with your manufacturer - although, not too hard as you’ll discover they are all too happy to cut corners with quality to meet your lower-priced demands. Increase your shipping volume - although, not too much as you don’t want to be lumbered with excess stock. Be as efficient as you can, but realise these are small percentage points you’ll be dealing with.
If you’re selling on Amazon, your major selling cost is going to be Amazon fees. A 15% referral fee and a weight & size-based fulfilment fee. There are a few things you can do to reduce these such as selling on your own website, and reducing the size of your packaging to drop a fulfilment tier.
But again, you’re going to be playing with minor percentage points. The real shift is going to happen by creating a great product, and building a cohesive brand, which will in turn allow you to...
This is where the big shift is going to take place. Whilst the other areas represent marginal gains, over the long haul this is where you can see a substantial change.
One way you can look to increase your selling price over the long term is by building brand equity. Consistently create great products that target a narrow audience and they will grow to love your products.
With this affinity comes an ability to charge a premium. Let’s be honest, there’s cheaper wireless earphones on the market than the AirPods, yet they grossed $6b in 2019. There are way better-looking cars than Jaguars, yet they grossed upwards of $30b last year, and there’s a reason Yeezys the footwear brand grossed over $1b selling sneakers for $100s… it’s called branding.
To grow your return on investment, combine a great product with a passionate audience.
If you want to learn more about building a brand, a great place to get started is in our free Brand Builder Bootcamp training.