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Is there a formula to calculate the return on investment in innovative stocks? Find out if it is safe to invest. First, it is necessary to define what ROI is. The acronym for Return on Investment generated the term Retorno sobre Investimento. The expression designates the metric used to calculate the yield obtained from a certain amount of investment. But is it possible to unite ROI and Innovation in an efficient formula?
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What, how, when, and why to calculate ROI
Basically, ROI is a simple formula to calculate how much a company earned from a made investment. Every project, action, or undertaking needs a financial boost, which is the investment that the company is willing to make to carry them out. In order for the company to continue operating, there must be an interesting return so that the investment is not lost. Therefore, ROI is an important metric, as it makes it possible to analyze in a solid way the profits and gains obtained.
The calculation is made according to the following formula:
Citation: ROI = (Gain obtained – Amount spent on the investment) / Amount spent on the investment.
TRANSLATING: Subtract the gain obtained in the action from the invested amount, then divide the result of this subtraction by the investment amount. The result of the division will be the return on investment. The analysis is subjective, and there is no formula for this. It is necessary to carefully interpret the results so that all variables are taken into consideration. For example, operational costs, shipping, fees, taxes, and other related costs. Therefore, it is not possible to stipulate what is or is not an ideal ROI. It is necessary to analyze case by case and learn from previous actions to establish acceptable margins.
ROI and Innovation: how to apply it?
Innovation, as the name itself suggests, is something new, unprecedented. Whenever a company decides to invest in something new, it must understand that it is walking on unstable and unknown ground. Therefore, it is not recommended to apply ROI to innovation. Although the formula seems simple to apply, the results have no reliable backup to base the analysis on. It is not possible to establish parameters of success or failure for innovative actions, as there are no precedents to serve as a basis. ROI works efficiently when applied to known, documented, and mastered actions. In this way, the company can set up a reliable interpretation scope with defined margins.
How to track the return on investment in innovation?
The traditional ROI formula and innovation are essentially incompatible, as the formula is more suitable for known actions with well-defined parameters beforehand. Despite this, it is possible to track other metrics during an innovation action. One of the most efficient and simplest ways is the classic trial and error. Exploration and learning provide important data to increase the number of closed contracts, track the quality and number of insights produced in relationships with clients and partners, and also analyze the number of possible acquisitions by the company. The data produced in this simple analysis can indicate how the action has been effectively performing in the market with both quantitative and qualitative information. Another efficient and more objective way of measuring is to evaluate the gains. Increased visibility, number of converted clients, penetration rate, and conquest of new niches and markets, reputation gain, and reliability are some examples of quantitative data for analysis. Furthermore, savings are also an excellent source of relevant information for measurement. Time, resources, pitfalls along the way, and a higher rate of successes than failures precisely indicate if the investment was worth it.
How to improve return on investment in innovation
It is necessary that the defined strategy encompasses a long-term vision vs. short-term execution. This means that while the project or action may span a longer period of time, execution must be done quickly. Innovation and timing are inseparable, which is why it is important to ensure that timing is one of the project's priorities. Gaining reputation is also fundamental. Delivering quick wins is an efficient way to gain legitimacy and increase trust in the company's capability of commitment and responsibility. In addition, quick wins are by definition low-complexity, low-investment, and highly cost-effective solutions: it is good for the customer and good for the company. A project carried out in stages is another way to identify potential pitfalls. This way, risks are noticed in advance, allowing the team to control the situation. Possible approvals or corrections stage by stage do not compromise the project as a whole. In the event of failure, the risks were already under control and the project does not fall apart completely. Finally, it is concluded that the return on investment in innovation is still a concept to be debated and explored. Innovating is a constant challenge. It is necessary to break with traditional conventions to explore uncharted areas and reach new possibilities and potentials. To better understand how to measure the return on investment in innovation, check out the material provided by the 500 startups website!
Fabio Caraça
Fábio Caraça is the Chief Growth Officer at Pix Force. He leads Pix Force's transformation into a scalable SaaS operation, combining strategic vision, culture, and high-impact execution.
