Return on Investment Calculation for Online Businesses

“Return on Investment” (also called “ROI” or “Rate of Return”) is one of the most important measurements for online business success. A high return on investment means that there is substantially greater income to cover the operating cost of the website. Or in other words, it simply means that the business is profitable.

Why is it important to measure ROI? If you need a business to last for a lifetime, it should sufficiently cover all of the operating expenses of the website. If the entrepreneur fails to meet this requirement, she/he will be forced to close down or sell the website to another owner.

In this article, I will illustrate possible ways to increase the return on investment in a website by proper investment planning. This involves selection of the proper web hosting company, using web development agencies, and/or even low cost tips on website marketing. Be warned that I am not recommending any particular web hosting or web development companies in this tutorial; it is your job to look for the right one that meets your requirements as stated in your business plan, and that includes % ROI calculation.

This tutorial applies to the following online entrepreneurial scenarios:

  • You are starting a website or blog that offers content to your targeted visitors; at the same time, you earn money via advertisements like Google AdSense.
  • You are starting an online shopping website that attracts visitors to buy items online.
  • You are planning to start a charity website. Though it is non-profit, you still hope to increase awareness and funding of your project through donations.

This article does not apply to personal websites that are set up for non-commercial purposes.

Return on investment mathematics may annoy ordinary business owners, especially the ones just starting out, but they are highly essential. Let’s define a few terms and look at the equations. 

Return of investment = (Total Net Profit/Total Investment) x 100%

Total net profit = Gross Profit – Total Operating Cost of the business

Total Investment = Total capital poured into the business

Let us illustrate an actual application of ROI calculations in setting up and running an online business.

For example, say you have invested a total of $5000 (web development and marketing start-up capital, like hiring a developer or an SEO to increase visibility in major search engines like Google) in starting your website. One year after launch, your total annual income (for example, through Google AdSense) is $1800, and the total hosting cost is $36. The ROI of your online business after one year of operation is:

Return of investment = (Total Net Profit/Total Investment) x 100%

Return of Investment = (Gross Profit – Total Operating Cost of the business) / (Total Investment)

% ROI = ($1800 – $36)/($5000) x 100%

% ROI = 35.28%

Of course, different online entrepreneurs may have different ideas for what they consider an acceptable % ROI. But their objective seems to be to the same: maximize the rate of return. 

In the above example, after one year, the business is expected to have a % ROI of 35.28%. If we do a rough computation, the total investment amount is $5000, but after one year the business earns a net profit of $1800 – $36 = $1764. This means it will take: $5000/$1764 = 2.83 years to reach the break even point.

After the so-called break even point, the business now runs in a purely profitable mode. If the business’s status stays the same — for example, maintains its quality of service and delivery, maintains its search engine rankings, and maintains a competitive price — the business could last for a lifetime, like Amazon.

There are several factors that influence the rate of return. It is important to control them in your business planning stage so that your business can attain maximum % ROI.

It all starts with domain registration. Here you have several alternatives through which you can save some money for your start-up capital. There are basically three approaches to domain registration which have their own weaknesses and strengths.

  • You can register your company name as the domain name.
  • You can buy a keyword-rich domain name which is already registered to someone else.
  • You can buy a new keyword-based domain name.

If you are a new online business owner with a brand to promote, registering your company name is the best approach. Registering it will cost only a few bucks, as compared to buying a keyword-based domain name which could affect the long-term branding strategy of your business. Think Google, Yahoo and eBay. The domain name is their company name.

If you are planning to run a blog with a specific niche and earn income from Google AdSense, buying or researching a keyword-rich domain name could help associate it with your niche and could be profitable in the long run. Make sure you have done your research in advance as far as the main keyword which you will be targeting to be used in your domain name.

Let’s look at an example. Say I have expertise in playing guitars and I am planning to offer a free guitar tutorial on a blog. I would like to earn income via Google AdSense. So I check the Google Keyword tool.

From this, I learn that “guitar tutorial” is attracting around 18,100 monthly visitors worldwide — that’s high traffic potential. And from using www.domaintools.com , I learn that GUITARTUTORIAL.COM is available for sale at around $750. You might want to read more on selecting domain names.

Now we can start doing some ROI computations:

  • Planned hosting cost: $150 (for three years plan/package).
  • Domain purchase (assuming this is the agreed price): $750.
  • Web development cost: $1500 (assuming you plan to hire a fairly good developer).
  • SEO Cost: $5000 (assuming you plan to hire a fairly reputable SEO company).
  • Total investment: $150 + $750 + $1500 + $5000 = $7400

Now we will do a rough computation of the expected net profit. Assuming the site will reach Google’s first page after a six-month SEO campaign for the main terms, and boasts a daily update of quality content, we can make the following estimates:

  • Estimated monthly visitors to the site: 18000 (600 visitors per day coming from major terms and long tail variations of your targeted guitar tutorial niche and blog post).
  • Estimated Google AdSense click through: 3%
  • Estimated earning per click: $0.2
  • Expected Net Profit = Estimated Monthly Visitors to the site x 3% x $0.2, therefore our expected net profit = 18000 x 3 % x $0.2 = $108

If you depend on Google AdSense alone as a source of income for your website, it will take $7400 / $108 ~ 5 years to break even.

And the corresponding percentage for the first year ROI:

% ROI = ($108* 12)/($7400) x 100%

% ROI ~ 17%

As you could see from the math on the previous page, the cost of your domain name is not the only factor influencing your ROI. There are at least three other things you need to consider.

  • Web Hosting Fees- Web hosting will cost you some money. But in our earlier example, say you are really savvy and get into a free and quality blog hosting platform like Google Blogger.com. You can save some money on web hosting fees. Note that free hosting is not a good idea for every kind of site.
  • Web Developer Fees – If you do not have any knowledge of web development, it could be costly to you, since you need to hire someone knowledgeable to implement your projects. But if you have some background, it is very easy to set up and start a blog online, as there are many free sites that let you do it. You do not need to hire a web developer. In this case, you can save some money again. 
  • SEO Company Fees – This is where many online business owners make a mistake. The reality is, hiring an SEO calls for extremely careful planning, especially if you are using ROI to measure the success of your business. There are pluses and minuses to hiring an SEO. Note that the SEO can only be responsible for bringing up your rankings, NOT YOUR CONVERSIONS in most cases. So it is possible that, even though you are at the top of search engine results, you do not have sales. This is because many SEOs do not care that much about conversions. They care about your ranking.

In the example above, the $5000 spent on hiring an SEO could be better spent in other things, such as hiring a high quality and viral writer to improve the web site’s conversion rate. This is just an example.

If you are using www.blogger.com as a means to publish your blog, there are a lot of great and easy to implement tips for onsite SEO

You do not really need to spend that much money to have a very good, SEO- friendly site.

How about link building? In reality, links from SEO companies do not provide value if they are not editorial in origin and coming from sites of proven, trusted value in the search engines. I suggest, instead, that you concentrate your efforts on developing a network of contacts that share the same interests as you in your selected niche. They have a higher chance of linking to you (because of your useful content) and offer you detailed insights into your blog, which leads to better search engine trust.

You can gain a lot of contacts from blog communities such as www.blogcatalog.com , Technorati and even Digg. I’m not saying this to underestimate social networking sites like www.friendster.com and Facebook.

So what is your new or adjusted % ROI if you want to cut down your cost?

  • Planned hosting cost: $0 (because you might be using a free blog publishing site).
  • Domain registration fees: $750 (still the same).
  • Web development cost: $0 (because you will be the one implementing the onsite jobs for your blog using easy and free tips).
  • SEO Cost: $ 0 (because you will be relying on the quality of your content as link bait for your network of contacts that share the same interest or niche).
  • Total investment needed: $750.

With pure hard work, a daily commitment to your marketing plans and dedication to your blog, you can even reach Google’s first page in the first six months, provided you add a lot of value for your readers and network heavily in the blog communities.

Thus, your expected net profit = 18000 x 3 % x $0.2 = $108 x 12 = $1296. And the time it takes to break even will be $750/$1296 = ~ six months after reaching Google’s first page. Therefore, your % ROI = ($108* 12)/($750) x 100% =173% !

Believe it or not, this is possible in a real online business scenario. If you are not the type of person that is willing to do the work yourself, then consider hiring experts to do the job and be ready to invest more.

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