How To Determine Return On Investment (ROI) For Services

Many small businesses struggle with the decision to purchase new services that will generate revenue through marketing and promotion solutions or reduce costs through business consulting & automation of operations. To properly make this decision, business owners must understand the fixed costs (FCs) and variable costs (VCs) associated with the purchasing of any service/product and how it will either increase sales or reduce costs. The FC & VC are part of the Break Even (BE) formula along with unit sales price (USP). The BE formula enables a business to identify the number of units that must be sold to recover all costs associated with the selling of a product/service.

The BE formula can be written as: BEU = FC/(USP - VC).

1. FC = $500; the monthly fee for the service
2. VC = $10; includes all costs per unit to include: selling, production, fulfillment, fees & etc
3. USP = $30; the price of the unit (service/product)
4. BEU = Number of units to be sold in order to recover all costs
5. For this example, this is a monthly calculation based on the information stated above

Now, let's work through the example. Using BEU = FC/(USP-VC) by plugging in the values as: BEU = 500/(30-10) = 500/20 = 25. In order to pay for the $500 a month service, you must sell 25 units monthly at $30 price per unit & $10 variable cost per unit. We can check the work by laying out the numbers.

1. FC = $500
2. VC = $10 * 25 = $250
3. Total Cost = FC + VC = $500 + $250 = $750
4. Revenue = $30 * 25 = $750
5. BE = Revenue - Costs = $750 - $750 = 0

Hopefully, this information will help you assess the value of a new product or service pitched to help your business grow. We are available to help you through this process. Contact Us Today! http://bit.ly/dTcContactUs