Return On Value vs Return On Investment (ROV vs ROI)

Considering the laissez-faire origins of modern capitalism,it makes sense that Milton Friedman, a prominent economist during the latter half of the 20th century, claimed the only social responsibility of a business was to increase its profits. 

His view favored the Return on Investment (ROI) which is still a popular way to measure the profitability of an asset. 

However, ROI only looks at financial benefits of a business decision and ignores things like: 

• Customer satisfaction
• Employee retention
• Regulatory compliance
• Environmental sustainability 

However, the return on value (ROV) considers a venture’s monetary and non-monetary benefits. Like how an increase in the production of goods to meet a quarterly financial goal, will affect employee productivity in the following months. 

Let us look deeper at ROV and how businesses can use it to make investment decisions that grow customer and employee loyalty – without exploiting humans or the environment. 

 

WHAT IS ROV?

ROV (Return on Value) involves thinking about the financial and non-financial values that come from making a business decision. 

ROV = (Revenue – Cost) / Value

If the campaign generated $1 million in revenue and cost $500,000, the ROV would be $2.

For every dollar invested in the campaign, the business generated $2 in value.

We can use a similar equation to assess the profitability of non-financial investments, except the ‘value’ would be non-monetary. 

 

Say a business invests in a meditation training program for employees; We calculate The ROV by looking at the Increase in Productivity minus the program cost.

ROV = (Increase in Productivity – Cost) / Value

If the meditation training resulted in a 10% increase in employee productivity and cost $100,000, the ROV would be $9. The business generated $9 in value for every dollar invested in the program.

 

This approach to measuring the value of an investment is far more holistic than only assessing a venture’s monetary benefit. In fact, a common framework used to determine ROV considers the environmental, social, and governance (ESG) cost of any operational choice. 

 

Looking at a business decision’s impact on waste production, gender issues, and adherence to state or national regulations helps employees and entrepreneurs understand the broader impact of an investment.  

 

Easier said than done, but ESGTree founder Majid Mirza suggests holding brainstorming sessions with team members when assessing the overall impact of business decisions.

”You’ll be surprised what comes out of it

Check out Mirza’s full Tedx Talk to learn more about how ESG adds value to your organization. 

Consider using Scrum practices like ceremonies and daily-stand ups or retrospective calls to brainstorm, streamline and scale ESG-centered approaches to business practices. Doing so may provide opportunities to optimize the non-monetary benefits of an investment or spot and navigate roadblocks to meeting ESG standards in a business venture. 

But before exploring ways to leverage the ROV for optimum profits, let’s cement our understanding of ROI and why it can limit access to business-scaling opportunities.

What is the Return on Investment (ROI)?

ROI is a financial metric; it looks at a venture’s monetary profits or losses relative to the amount initially invested. 

The calculation generally includes: 

• The amount you currently spend (monthly or yearly).

• The amount you plan to spend (monthly or annual) after the project ends.
• The amount you need to invest in executing the project. 

The most common way to assess the money made on an investment is to subtract the venture cost from the revenue, then divide it by the venture cost. It looks like this:

ROI = (Revenue – Cost) / Cost

It’s important to note that this formula can be adapted to fit the particular needs of an investment. 

 

Here’s another example: 

You spend $200,000 on operations per month. After the project ends, you plan to spend $175,000 on monthly operations. The cost of the project is $75,000. Your cost savings per month is $25,000. Take the cost savings divided by the project cost, and you get 3 – it will take three months to get a return on your investment (ROI).

 What is so Bad About ROI? 

We understand that calculations are more complex in the real world. Some projects, like constructing an apartment block or launching a product, have a very long ROI period – it can take years to see any return on your investment.

This may make stakeholders antsy, causing some entrepreneurs to shorten deadlines or favor cheaper materials. 

This can cut production time or quicken profit margins, but may take a toll on employee well-being and wreak havoc on the environment, costing more money in the long run! 

The Health Action Council suggests mental health issues like anxiety, depression, and exhaustion drain $152 billion from U.S. companies and $1 trillion in productivity losses in businesses worldwide. 

While the Green Business Bureau says using energy-efficient equipment or water-saving devices keeps long-term costs low.

Otherwise known as Consistent Delivery of Value, this approach captures the value of an investment over time: it allows businesses to compare assets, basing decisions on which will generate the most consistent returns.  

 

Let’s take a deeper look at other benefits of prioritizing the ROV.