Do You Know Your ROC?

ROC = Returns on Costs

Yes, I know that every dashboard, every analytics software, every measured metric tool, includes something on returns (ROI, usually).

But that is not what I am talking about! Not everything is an investment in economics. Investments should meet at least one of these criteria:

1. Borrowed dollars (capital) to fund them.

2. Used previous savings (capital) to fund them.

3. Paying or losing interest ($) on those used funds.

If you are paying for an AI or digital tool or for data storage or cloud or cybersecurity on a subscription (monthly or annual) basis, as a part of ongoing COSTS for your business, it is NOT an investment but one of the usual costs. (In economics terms, it most closely resembles "land.")

In this example of a very small business:

1. Current Costs = $20K/mth = $240K/year

2. Current Revenues = $45K/mth = $540K/year

3. Current Profits = $25K/mth = $300K/year

If AI/digital subscriptions are obtained at 5K/mth (60K/yr):

1. There might be no big difference in first Quarter.

2. In subsequent quarters, revenues are likely to rise.

3. Increase in annual cost = (300 - 240)/240 = 25%

4. Increase in annual revenue = (765 - 540)/540 = 42%

5. Increase in annual profit = (465 - 300)/300 = 55%

So, how to calculate Returns on Cost?

• Additional new Cost = $60K/yr.

• Returns on Cost for Revenues = (765 - 540)/60 = 375%

• Returns on Cost for Profits = (465 - 300)/60 = 275%

Actionable Insights for SMBs:

1. Make sure to identify the right tools first.

2. Don't jump on to every hype and over commit.

3. Don't delay in making decisions on AI adoption.

4. Consider ROI only if you are "investing" long term.

5. Returns on Costs are easy to measure in short term.

6. Many subscription costs can be reduced very quickly.

P.S.: Do you use a Returns on Costs equivalent metric?

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