ROI is the Real Measure of Success - Investment

ROI - return on investment - is a common enough term that most people generally understand what it means. In an investing context ROI is generally measured as profit / investment and used to evaluate the relative merits of two different investments. So for example if you invest $1,000 and yield a $200 profit your ROI would be 20%.ROI is a useful measure in other contexts as well and particularly in the world of web development and making money online ROI is really the ultimate number that will decide if a project (or task) is successful or a failure. But ROI in this context has some slightly different nuances since both return and investment can mean a variety of things.

Let’s take the term in reverse order and start by examining various forms of investment as they relate to web development.

Monetary Investment

photo credit: sunshinecityThe most readily apparent form of investment is a monetary investment. Startup costs vary widely with web development projects. Depending on who you are and what you’re building startup costs could involve millions in programming and design. For a smaller scale or solo developer startup costs are generally more contained - perhaps the costs of a custom template for your site and and few off the shelf scripts. For a blogger your costs might be as little as a few bucks for a domain name and a small hosting plan. In some cases direct monetary startup costs can even be zero - it costs nothing to startup a blog on wordpress.com.

There are also non-startup costs that are typical for web developers. These include advertising and promotion investments, licensing/partnership fees and hosting/bandwidth costs. A frugal web developer can do promotion for little or no money by seeking free backlinks and applying other free SEO techniques but very often a web project needs an advertising boost to get started. This might include paid inclusion in directories, paid blogger reviews and CPC programs like AdSense. Most web projects don’t need to be concerned with licensing fees but if you need to purchase access to some data for the site to work that will be an ongoing investment expense. Hosting and bandwidth costs will vary according to the type of site and can be anything from negligible in the case of a blog to overwhelming for video sharing sites.

Time Investment

photo credit: taiyofjAnother form of investment is easy to downplay but is vitally important when measuring the ROI of the projects you undertake. With my “big successful site” I could claim that I was getting a positive return after less than a year while earning a meager income. That’s because I had tiny monetary costs associated with the site - just a domain name and shared hosting account. But in reality that ignored my greatest investment which was about man year of labor. Your time may be free to you but it’s also a limited commodity and so when you spend time on something you are truly making an investment.

One thing you can do when you work to evaluate your ROI is to attempt to assign a monetary value to non-monetary costs and benefits. In the case of an investment of time this more difficult than it might at first appear. You can work out your hourly rate at your day job and say that the time you spend at your web project costs the same per hour. But for most of us that’s not necessarily a direct comparison. If you weren’t working on your web project would you have the option of spending those hours on your day job? Perhaps a better method is to look at what you give up in order to spend time on web development. If your project comes at the expense of watching American Idol you can say that your time is free. If your project comes at the expense of spending time with your family you can say that your time is priceless. The real cost of your time expenditure will depend on your own personal situation and is likely to vary over the term of your project.

Social Capital Investment

Once you’ve figured the money and time you need to spend on a project you may think that this is all that you’re going to invest in your web development project but that may not be the case. If you’re launching a social site you’ll need to seed it with some early participants. So you e-mail a bunch of your friends and ask them to checkout the site. Or perhaps you’re launching a content site and decide that you want to promote it via a post on a forum you’ve been frequenting. Assuming these things are ok with your friends and the forum policies these are good techniques but again you need to be aware that the ability to make these requests of friends and forums is limited. You’re spending some of your social capital to get your friends or forum readers to your site. This investment may cost you in the reciprocal demands that these groups will make on you in the future or it may just cost you in the ability to use the same techniques again in the future. I’m happy to help a friend launch a site but if he’s asking for help every other week it’s going to get old quickly.

Reputation/Integrity Costs

On the web as in life you may find yourself faced with a money making opportunity that is on the shady side ethically or morally. Perhaps you’re considering launching some MFA sites with screen scrapped content. Or maybe you have an opportunity to run bulk e-mail campaign that makes money but goes against your moral code. When evaluating an opportunity remember that if it’s not something you can be unquestionably proud of it may have a cost to your reputation or you own self image. Some are hardened and say they don’t care but for most people these costs will affect you either now or in the long term

Lots of Investments

I’ve look just at the investment side of the ROI equation here and as you can see the potential costs you face when undertaking a web development project can be quite varied. Next I’ll take a look at the more fun side of the equation and look at what kinds of returns a website can bring and how to use the whole concept of ROI to guide your business decision.