Your Return On Investment: A Fundamental Of Business

When first starting out in internet marketing, you are unlikely to think too much about your return on investment (ROI). You might spend a bit of money on software, link building, and content creation, and just see how it goes. That’s certainly what I have been doing. I do not know the extent of my investment to date in my internet business, but I do know it far outweighs my earnings. For instance, I have purchased Market Samurai, and a month’s subscription to Unique Article Wizard (neither of these are affiliate links – why?), amongst many other things.

So before I start telling you about how important calculating a ROI is, and before I reveal the strategy upon which my company’s six-figure property purchases are based upon (which can apply directly to our online businesses), I better explain why I have not been bothered about my ROI to date.

Quite simply, I consider myself to have been in a ‘research and development stage’. I have viewed my ventures to date as a learning experience. You could consider the money I have spent as some kind of tuition fee. I am always harping on about “learning by doing”, and I am gladly the victim of my own teachings. The best way to learn is to do, and I have lived by that fact. You could say that my business isn’t yet really a ‘business’, as my primary concern hasn’t actually been making money – it’s been learning.

That is now changing. I feel like my continued education and making money can now start to walk hand in hand. As my first niche site begins to experience some success (sign up to my newsletter to get the latest news on Sunday!), I will now start to contemplate how I should invest my money in order to increase my earnings. And that is where I have to start considering my ROI as well as the margin of safety I wish to employ.

The Double Barrelled Margin Of Safety

In case you don’t know, I am the director of property management and development in my father’s business. I have been with the company for just over five years, and we currently have net assets worth comfortably in the eight figure range. We tend to ‘recycle’ (i.e. buy then sell) properties rather quickly. We aim to hold properties for no longer than a couple of years, and occasionally ‘flip’ properties within a matter of weeks.

As such, we are constantly buying new properties. With such a high turnover rate, we always need to make sure that our investments are conservatively priced. This is where our ‘double barrelled margin of safety comes in’. It is rather simple:

1. Assume you will sell at a very low price
2. Aim for a high return

This prices us out of the vast majority of properties on the market, but still allows us to make a healthy number of investments. With this strategy you have two levels of protection. First, if your projections are conservative, your sale prices should be much higher than anticipated. Second, because your projected return is so high, you will still make a good amount of money even if the investment doesn’t perform as you would like.

From Property Investment To Internet Marketing

This strategy can be employed in any line of business. I am now in a position where I can start to make predictions as to what kind of return my investments will produce. These predictions will be rough around the edges, possibly naive, and certainly based upon a low level of experience. As such, I need to make sure I am running with a double barrelled margin of safety in order to protect my investment as best as possible.

The earlier you start tracking and analysing your investments, the quicker you will gain a much better understanding of your business.

An Example

Take my niche site, Modeling For Kids, as an example. The numbers below are theoretical, but loosely based upon some calculations I have been doing recently.

I have a new keyword that I want to rank for. Having examined the competition, I feel very confident that I will be able to rank #1 with some dedicated keyword research. I think I can do this by investing in a two month subscription to Unique Article Wizard (not an affiliate link – why?). So, let’s conservatively assume that I will need a three month subscription, just to be sure. In addition to that, I am going to be spending an hour every day working on my backlinking strategy. Let’s say I value my time at $25 an hour. My total investment, after 3 months, will be $2,481.25 ($200 investment in UAW, and $2,281.25 in my hourly worth).

The keyword I aim to rank for produces 500 exact searches a day. I am basing my projections on exact searches only, which is conservative, as I should expect more than just the exact amount. The #1 spot on Google should bring around 40% of searches to my site. Therefore, I should get 200 new visitors a day, minimum. My site is currently monetized with AdSense, and my historical click through rate (CTR) is around 5% of unique visitors. Let’s assume the CTR is a little lower – 4%. That means I will get a projected 8 clicks a day.

Haven’t fallen asleep yet? Good! What’s next? Cost per click. AdWords tells me that the keyword costs $1.90 per click. Typically, it is said that Google pays out just 30% of the AdWords cost. In my experience, it is even a little lower than that, so let’s assume it is 20%. Therefore, every click will earn me 38 cents. And as such, my income per day is just over $3.

So now let’s put that all together. My initial investment is $2,481.25. Assuming I reach #1 in Google at the end of third month, my earnings in the first year will be $821.25. That is an annualised return on my investment of 33%. Not only is that above my desired annual return of 30%, the numbers I have used are conservative. I am planning for the worst, but can hope for much better.

So, as per my double barrelled margin of safety, I am assuming I will sell at a very low price (i.e. my income per click and traffic numbers are low), and I am aiming for a high return (33%).

You may be saying, yes, but it’s only $800 in a whole year, but remember – I valued my time at a relatively whopping $25 per hour. You can outsource such work for a damn sight less! If you outsource the vast majority of the work and do ten times as much, then your earnings are $8,000. And 100 times as much makes it $80,000. And don’t forget that the numbers are extremely conservative. The sky is the limit.

Don’t Forget That You’re Running A Business

As you may have gathered by now, I am taking this very seriously. And if you are on this blog, then you probably should be taking your online venture seriously too. As you likely know, Leaving Work Behind is about starting your own sustainable and scalable online business. Given that I am discussing my future livelihood, I’d be an idiot not to treat it like a business. Because whilst it may not be yet, it certainly will be.

So give some thought as to what you want your ROI to be. Consider how fat you would like your margin of safety. And once you have found an effective way of making money online, you’re on the way – just work out the numbers and scale up.

What are your thoughts on my approach to calculating my ROI? Do you do things differently? I’d love to know how you approach your business.

Photo courtesy of Ribbit