ROI: Understanding the term "Return on Investment"

ROI, by now you are all familiar with the term Return on Investment. But many people have this idea that the percentage needs to be a strict guideline and that percentage is one of the biggest deciding points of what to buy. There are several ways to look at ROI, and Bob Steele is big on an alternate view of ROI on time versus the popular view of ROI on your $$. So what is your true ROI?

Let me give you a few examples here.

Buy cost $5, sell price $15, profit $4, ROI 80%
Buy cost $8, sell price $17, profit $4, ROI 50%
Buy cost $50, sell price $$90, profit $20, ROI 40%

Now some people will look at these three items and automatically pull the trigger on the $5 item because it has an 80% ROI that meets their criteria. And that’s not a bad decision. But let’s look at this a little further and let’s say these $5 items you can fit 20 in a box, so with the cost of the box, tape labels, etc, that’s another $4 in costs. Not counting inbound shipping on these since costs vary so much with destinations and weight. But you buy 20 of these and can process all 20 in half an hour and have a rough profit of $76 for 30 minutes of work. Not bad.

Now let’s say you buy 10 of the $50 item, same thing, you can process them all in half an hour and let’s say it’s a little larger item and you need a couple boxes so that the cost of processing these are $10. That’s $190 rough profit in 30 minutes.

So while the ROI in dollars for the $5 item is 80%, the ROI on your time is $152/hour. The ROI on the $50 item is only 40% but the ROI on your time is $380/hour. Making you more than twice as much in the same amount of time.

Obviously budget is a deciding factor on some of these and not everyone wants to sink $500 into a single item (although you will get there someday if you keep growing), but remember that your time is a fixed asset, you only have so much of it in any given day or week. Getting the max ROI on your time is sometimes more important that the ROI on your dollars.