ROI

Return On Investment, the ROI, refers to the amount of profit you earn on every dollar spent. Two businesses may sell product A for $100 each. Company A may have an ROI of $40. Company B has an ROI of $20.

Both of these companies sell the same product, for the same price, but company A is better organized, has fewer expenses, and sells more products for the same cost.

A low ROI can be the result of poor office management, or a poor sales record. There are several different factors that may lower the ROI. But, in short, the ROI is based on the number of sales you can generate on your yearly operating budget.

The more sales you generate, the higher your ROI.

There are several ways to increase your ROI. The first is to take a close look at the cost of operating your business. Many businesses operate under a lot of waste. They hire a full time secretary when outsourcing would be sufficient.

The second method is to tighten up the companys sales network. This may involve spending money on research. It may require and investment in time to learn what your consumers want, need, and what problems draw them to your product or service.

Two-Way Marketing

Most companies that have a low ROI also lack a two-way marketing plan. They may do market research, or run some surveys, but they also lack of two way communication between the company and the consumer.

Many high-profile companies believe that courses, convention weekends, and marketing surveys are good substitutes for two-way communication between the company and the consumer.

Unfortunately, all of these types of marketing are one way. They keep the company in control of the information control. The consumer has only two choices. They may respond to the company representative or agent, or they may remain quiet.

Two-way marketing allows customers the opportunity to voice their opinions, concerns, and write their own content. Then the company collects the information and uses it for marketing, even if it contradicts their current target marketing efforts.

Television companies do this. They consider that 1 response to a program is worth 1000 responses. So, a company that has 10 responses that suggest a new problem, or concern, can represent another 9000 or 90 000 people who did not take the time to respond.

This type of marketing is not an inconvenience to overlook. It is a powerful marketing tool that can be used to find secondary markets or products that might increase your ROI.

For example, lets say that you sell a how to start a business course. However, your course package offers a mentorship program that includes 1 hour a month with a certified Success coach. This not only sells a business to consumers, but it sells problem solving.

Profit

Increasing ROI will also increase the profit. There are a thousand methods of increasing an ROI. The easiest to understand, and cheapest, is to build two-way marketing between the consumer and the company.

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Investors may also feel attached towards a specific company and continue owning the stock without regards to its fundamental. For example, you might like Google’s search engine so much that you decide to buy the stock at $ 350 without doing any research. You figure that Google’s search engine is so much better that buying the stock will give you profit, right? Wrong. Now, I am not here to bash Google as an investment, but analyzing an investment goes beyond the products and companies. Most investors can identify good companies and products. It is quite easy. You know that a Mercedes is a better car than a Ford or a Civic.

The next question is how much should you pay for a Mercedes or a Civic? This requires us to put aside our emotion for a second and think clearly. Sure, you’d like to have a Mercedes in your life. It is luxurious and have a lot more fancy features than a Civic has. But, that does not mean you should overpay for it. It works similar with stock investing.

Google is a good search engine, probably the best that is ever produced so far. Sure, you probably pay more for Google than other generic search engines. But, please don’t over pay. You invest in Google to profit from it not because you like its products.

So, how do we eliminate emotion from our investing decision? We can’t eliminate it completely but there are certainly tools that might help. One is to calculate the fair value of a common stock that you are investing in. I covered this plenty of times but basically, the fair value of an investment is dependent upon the streams of profit generated by it. In the long run, if company A earns more than company B, then company A will be valued more than company B.

For a company that is growing such as Google, you can incorporate its growth and calculate the fair value with growth. I have talked about this once and you are welcomed to check our commentary section.

I know I don’t exactly give you the best solution to the problem. Emotion is hard to ignore. I am not immune to that. But following your emotion will cost you a lot of money. Just watch those investors that bought during the NASDAQ peak in 2000. Don’t follow the herd and keep your focus on the fair value of your stock. You will do really really well.

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