Oct
23
2008

The Pumpkin or the Apple ROI Calculation

So you have probably figured out that doing an ROI Calculation is an important part of any project (yes even in Higher Ed). ROI (return on investment) is a key indicator to a successful marketing campaign, especially when you are collecting money.

What the heck are the Pumpkin & the Apple all about though? You probably have heard the comment about comparing Apples to Apples, well that pretty much explains it. I found out a few days back that there is more than one ‘ROI’ Calculation (who would have guessed). As you would expect one is going to be the Pumpkin and the other is the Apple.

Definition of ROI

According to Wikipedia.org it is “In finance, rate of return (ROR), also known as return on investment (ROI), rate of profit or sometimes just return, is the ratio of money gained or lost (realized or unrealized) on an investment relative to the amount of money invested.”

Did that make sense to you? Well for the non-finance majors out there let’s simplify this.

  1. The rate of return = A Percentage Result
  2. Rate of Profit = the amount of gain/loss for the project (yes loss)
  3. Return = what you can expect to get back from similar projects

The Pumpkin ROI Calculation

This is probably the most widely misused ROI Calculation since it shows an over inflated result. The calculation is also the simplest ROI Calculation.

What you’ll notice from the above calculation is that it happens to only work for a positive rate of return, meaning that the ROI can never be 0% or Negative. Well we have all probably seen (especially with the current economics) that ROI can be Negative.

For example you spend $500 total to mail out a postcard and only get back $5 in donations (we would hope not but hypothetically speaking). The Pumpkin ROI Calculation would tell you that you get a 1% ROI for the project. However, we all can tell that $5 does not cover the cost of the $500 we spent to produce the mailer… so in short you’d have to consider the $500 a sunk cost for that calculation to work.

The Apple ROI Calculation

So maybe you noticed on Wikipedia that there is a calculation about arithmetic return. In short this calculation allows us to take into consideration the total cost and generate a 0% or Negative Return (yes it does actually happen).

This calculation takes the Total Cost and removes it from the Total Revenue (yes I know accountants know that Total Revenue means Earnings – Costs but that is not the words used on the calculation typically) and then we divide that by the Total Cost (remember that multiplying by 100 just makes it a percentage).

So going back to our example of a $5 Revenue and $500 Cost you’ll notice that the ROI is now more accurately showing that we get a -99% ROI. Meaning that we did in fact lose money on this particular project (a great deal of money) and it could be categories as a Never Try this Again appeal.

Why in the Heck is this important?

It is very important make sure that you are comparing Apples to Apples with your calculations as well as the answers title. Just because someone says this is the ROI for project XYZ, does not mean they have the same calculation for ROI as you do. It never hurts to ask the person providing you with numbers for their calculation and it could save you from making some costly mistakes.

Check this out too.

Karlyn’s recent post on Adding internal costs to ROI calculations. She brings up a good point on how to calculate Total Cost within Higher Education which is defiantly something we need to start looking at doing more.