CALCULATING A PROJECTS RETURN ON INVESTMENT (ROI)

Measuring the Return on Investment (ROI) on any proposed business venture, or an existing business where additional investment is proposed to be made, is an important aspect to consider when deciding on whether to invest the funds into the business. It is a preliminary measure to indicate whether a project will generate a positive return on the funds invested based on existing conditions and assumptions about the future. To better illustrate this concept, I will map out a ROI analysis on a fictitious company.  Most companies also have a pre-determined hurdle rate against which they measure any new project to determine whether or not to proceed with the proposed investment.  MidRange uses a hurdle rate of 25%.

THE COMPANY: MidRange Bikes

MidRange bikes is a bike retail business operating in Brisbane with three stores. The three stores are independently managed but operate under the same brand umbrella and common owner. The Shops sell good quality bikes at a good price with a stable average Cost Of Goods Sold (COGS) and Sale Price. The MidRange brand has operated until now with a simple one page website consisting of basic details about the business and little else. A Facebook page has been setup but is not regularly maintained.

Currently the shops are experiencing low yearly sales growth which in the current climate is concerning. Cycling is becoming more mainstream year after year with the Brisbane City Council’s investment in cycling infrastructure and the general public realising the health benefits of the sport and the convenience it offers when commuting. MidRange should be increasing its sales in line with the overall percentage growth in cycle sales but its below trend performance has caused the owner to look internally at his business and attempt to identify areas that can be improved.

ISSUES IDENTIFIED WITHIN THE BUSINESS

(a) Marketing and sales strategies within the three stores is not coordinated. Special deals on bikes advertised in one shop are not being mirrored in other shops which is confusing and dividing customers. An example identified is if a customer was to buy a bike at one shop at full retail and then see the same package offered with a substantial discount at one of the other MidRange stores, confidence in the brand would drop and repeat custom would be unlikely.

(c) Standards of bicycle servicing are not consistent throughout the three shops. Procedures are not being coordinated which has led to inconsistent pricing and customer confusion towards servicing across the three stores.

(d) Sales are being lost. With the rise in online retailers within cycling, MidRange has seen a steady decline in small parts sales over the last year as customers turn to the internet to purchase their requirements. MidRange needs to improve its sales volume via the internet to complement its in-store sales and to offset any drop in sales of fully built up bikes when business is slow.


STRENGTHS OF THE BUSINESS

The owner of MidRange was able to identify positives within the business.  The main ones he identified are:
1. Highly rated customer service
2. A loyal customer base who speak positively about the business
3. Good shop locations with ample parking
4. A young staff base who are all at least familiar with social technology

GOALS FOR MidRange

With these strengths and weaknesses in mind the owner has set some goals for his three stores.
1. Increase sales by 15% within the next year
2. Coordinate marketing and sales strategies for all three stores 
3. Create a standard procedure for servicing across the three stores
4. Create an online web store to re-capture sales being lost to other online retailers

PROPOSED TECHNOLOGIES TO IMPLEMENT

1. Atlassian Confluence: Cloud hosted [$10/month for 10 users]

The Confluence platform offered by Atlassian is a highly functional social tool for corporations. It is geared towards companies with a development function but has a broad range of features which would be easily applicable to the MidRange business.  The Confluence functionality that would be utilised by MidRange would be:

• Blogs and threaded discussions. This would allow for organisation wide announcements to be published and kept for reference. This would ensure that all three shops would be able to move towards a cohesive strategy for many aspects within the business including marketing and sales promotions specifically.
• Rich Content Editor/Knowledge base. The rich content editor and knowledge base would be used in the same way a wiki is utilised to alleviate the problems with inconsistent service standards. Service manuals and guidelines would be able to be created so that all relevant staff could access and modify the document in one place, with the ability to track version changes. This would create a collection of standard operating procedures that would be regularly reviewed and maintained by the service co-ordinator to ensure that they are up to date for all bicycles sold by MidRange.
• Shared Calendars. Having the ability to have a centrally maintained calendar would complement the blog in showing a timeline for promotions and marketing initiatives so that all shops are coordinated in their efforts.

Confluence is a powerful tool not specifically geared towards a small chain of bicycle shops, however, it has a selection of functions that would solve two of the main issues being experienced by MidRange at a price that is more than serviceable. It could be argued that the products value would be lost being used for such simple purposes, but as the needs of the business grow, it’s ability to utilise Confluence’s entire package should increase.

Confluence Cost breakdown

MidRange is open 51 weeks of the year

Platform cost

$10/ month for 10 users (only essential staff needing to access)
yearly cost $120

Training Costs


(It is assumed that within this training, users will populate the system with real data for continued use whilst learning to use the software)

Training costs $500 per staff member (5 day course)
Total training costs (10 staff x $500) = $5,000
Wage costs for 5 days for 1 staff member ($25/hr x 8hr/day) = $1,000 
Total wage costs for 10 staff (10 staff x $1000) = $10,000

Opportunity costs of training

Average daily sales per employee $800
Average lost income for training duration (5 x $800) = $4,000
Total projected lost income for 10 staff (10 x $4,000) = $40,000

Wage Costs for weekly usage

Hours used by staff per week 20 @ $25/hour  = $500
Wage cost attributed to Confluence use per year (51wk x $500) = $25,500

Opportunity costs for weekly usage

Average daily sales per employee / 8 hours = $100/hour
Hours used by staff per week 20 @ $100/hour = $2000/week
Opportunity costs attributed to Confluence use per year ($2000 x 51wk) = $102,000

Total Cost = ($120 + $5,000 + $10,000 + $40,000 + $25,500 + $102,000)
Total cost for the first year $182,6200

Confluence Benefit breakdown

Reduction in tripling up on processes to do with marketing/promotions

(10 hours a week @ $25 hour x 51 working weeks) x 2 repeated processes = $25,500 saved

Increase in sales due to effective promotions and marketing

Projected sales increase per week = $10,000
Less Cost of Goods Sold = $7,000
Wage costs to implement promotions per week = $200
(weekly increase ($10,000) - COGS ($7,000) - staff costs ($200 x 51 weeks) = $142,800 increase

projected increase in services carried out due to customer confidence and satisfaction

average time per service 1.5 hours
staff costs per service $37.5
average price of a service $75
average profit per service (price - cost) $37.50
expected increase in service’s per week - 20
increase in profit over a year
(weekly increase (20) x profit/service ($37.5) x 3 stores x 51 weeks) = $114,750 increase

Total benefit = ($25,500 + $142,800 + $114,750)
Total derived Benefit $283,050

2. Shopify web hosting and online store [$79/month professional package]

Shopify is an online hosting service with a focus on allowing users to create a functional web store, with all the backend services including hosting, database management, e-commerce and design taken care of under the monthly service cost. Users are able to create a comprehensive website and external facing blog with a range of templates, or use a website designer and programmer for a fully custom package. MidRange has elected to employ a designer and programmer to create a fully customisable website. Under the $79 a month plan, Shopify subtracts a 1% transaction fee. The Shopify website allows for social media integration. This functionality could allow for cross promotion through both the shops Facebook page, bulking out their Facebook content, but would also allow for customers to share wish lists and purchases on their own Facebook pages.

Shopify Cost breakdown

Initial Setup Costs

$79/month subscription per year = $948
Cost of designer/ programmer = $15,000
projected sales per week via web = $15,000
projected transaction fee per week = $150
Yearly transaction fee ($150 x 52 weeks as website does not shut) = $7,800

Training Costs 


(It is assumed that within this training, users will populate the system with real data for continued use whilst learning to use the software)
Training costs for 2 employees who will maintain website
$400 per staff member for 3 day course = $800
Wage costs for 2 staff members whilst training
3 days x ($25/hr x 8hrs) x 2 staff = $1,200

Opportunity costs of training

Average daily sales per employee $800
Average lost income for training duration (3 x $800) = $2,400
Total projected lost income for 2 staff (2x $2,400) = $4,800

staff costs attributed to upkeep

5 hours a week @ $25/hr x 2 staff = $250/week
wage costs attributed to Shopify upkeep per year ($250 x 51wks) = $12,750

Opportunity costs for weekly usage

Average daily sales per employee / 8 hours = $100/hour
Hours used by staff per week 10 @ $100/hour = $1000/week
Opportunity costs attributed to Shopify use per year ($1000 x 51wks) = $51,000

Total Cost = ($948 + $15,000 + $7,800 + $800 + $1,200 + $4,800 + $12,750 + $51,000)
Total Cost for first year $94,298

Shopify Benefit breakdown

Increase in sales due to Shopify webstore and website

Projected sales increase per week $15,000
Less Cost of Goods Sold $10,500
Staff costs for order processing per week (15 hours @ $25/hr) $375
((weekly increase ($15,000) - COGS ($10,500) - staff costs ($375)) x 51 weeks) = $210,375 increase

Total Benefit for first year $210,375

ROI CALCULATION

Total Costs

Total Confluence Costs $182,500
Total Shopify Costs $94,298

$276,798

Total Benefits

Total Confluence Benefit $283,050
Total Shopify Benefit $210,375

$493,425

ROI = ((Gain from investment - Costs of investment) / Cost of investment) x 100
ROI = (($493,425 - $276,798)/$276,798) x 100
ROI = 78.2%

ROI CONCLUSION

As the proposed investment by MidRange generates a positive ROI in excess of the company’s hurdle rate, the project would be implemented.

McKINSEYS LEVERS

An ROI calculation is a great way to estimate or benchmark the potential monetary gain of a future project, but it is important to consider the intangible benefits as well as these can be equally as important, even if they are harder to quantify. Relating the two proposed technology improvements back to the Mckinsey Value Levers detailed in the report  The social economy: Unlocking value and productivity through social technologies allows for consideration of these intangible benefits.

Confluence

The main value levers that confluence could leverage would be in the Business support area and across the whole enterprise. Within the business support area confluence would improve the ability for staff to collaborate and communicate on issues within the business, allowing smoother day to day running. Across the organisation Confluence would allow for the centralised coordination of marketing, and the creation of a knowledge base for servicing which would ultimately make the business more efficient.

Shopify

The creation of a Shopify web store with social integration would be a great way for MidRange bikes to realise some of the value in the Marketing and Sales area that they have failed to take advantage of. The web store allow them generate and foster sales leads that they would not be able to with a bricks an mortar store. It would also allow them to utilise their stagnant Facebook page for marketing and customer interaction as content from the web store would be easy shared, and could be used to push sales items and specials. 

WHAT THE ROI ADDRESSES

MidRange's ROI analysis is a great tool to consider all the possible monetary costs and benefit's that are at play in their proposed Confluence/Shopify project. It gives the owner a good insight into what costs to expect, including the opportunity costs that are associated with training, software and support. It also gives an indication to the benefit that could be realised if the project was implemented successfully, and a benchmark to continually measure the projects success once in place.

WHAT THE ROI DOES NOT ADDRESS

This ROI analysis is a great tool to show what a project can potentially achieve, but it gives no indication on the how to properly implement the project, and the steps needed to realise the potential success. It is a top level analysis used to decide whether a project should be implemented. In  MidRange's case, the ROI give no indication on the best ways to use confluence or what products would provide the best sales over Shopify. It doesn't consider forces outside of the organisation infringing on the projects success.

IN CONCLUSION

Predicting the success of a proposed project is always going to be hard. Its a lot of educated guesses and experience being used to predict the future. An ROI calculation is not a guaranteed figure of profit, and it should not be used as roadmap to realise success. It is a guide and should be constantly reviewed as the project develops. It should also be read in close consideration with the identified intangible benefits that a project could yield as together, you could be getting more value than you bargained for if you play your cards right.