Understanding how to calculate the return on investment (ROI) of business coaching is complicated. In this article, we’ll break down the different ways to calculate ROI, explore some common KPIs, and teach you how to decide whether your coach is providing value or not.
What is Business Coaching?
Business coaching is a discipline that involves an independent coach and a business working together to improve something about the business. It’s not the same thing as mentoring or consulting.
Importantly, executive coaching (where a coach works with an executive to improve their performance) is normally considered a type of business coaching. In this article, though, we won’t be talking about executive coaching – calculating ROI for executive coaching is very different to calculating ROI for other types of business coaching.
The Importance of ROI in Coaching
Before we go any further, let’s take a moment to understand why calculating the return on investment (ROI) of your business coach is important.
In business, the ultimate goal for every company is to make money and grow. This isn’t true of every business owner, executive, or organisation (think non-profits), but all businesses need to turn a profit. A business is an organism, and its life-source is revenue – stop feeding the business, and it will slowly shrink and die (or be consumed/killed by a larger competitor).
As such, making sure that your resource usage (time/money expenses) generates financial return is important. You don’t want to waste resources on something that isn’t actively helping your business to grow and profit. For some expenses, the ROI is obvious – you buy a product from a supplier (expense), mark up the price, and sell it (expenses covered + profit).
The impact of other expenses, though, can be so far removed from revenue that it’s hard to see whether they’re actually worth it. Business coaching is one of those expenses.
If you’re the owner of a small business, you might be close enough to daily operations that you have a good ‘gut sense’ of whether your coach is paying dividends or not. But not every executive or owner is so lucky. If you’re not sure whether your coach is ‘worth it’, taking a measured, objective approach to calculating ROI can help you make a smart business decision about either retaining their services or letting them go.
What’s the ROI Formula?
The return on investment formula is: ROI = ((benefit – cost)/cost) * 100. ROI is typically expressed as a percentage.
When the benefits outweigh the costs, the ROI will be positive. When the costs outweigh the benefits, the ROI will be negative.
Qualitative vs. Quantitative Approaches
There are two main approaches to calculating ROI: qualitative (subjective/type-based) and quantitative (numerically measurable).
Qualitative ROI
An example of a qualitative approach is the gut sense we talked about earlier. You could ask yourself: “Do I feel as though my coach is still delivering business benefits?”. If you answered ‘yes’, you might choose to retain your coach; if you answered ‘no’, you might choose to let them go.
Quantitative ROI
A quantitative approach, in this context, aims to measure the coach’s actual impact on revenue or profit. For example, let’s say you hired a coach and one of the things they helped you do was reduce your staff turnover rate. You worked out that between recruiting, onboarding and exit costs and lost productivity, each staff member who resigned cost you $10,000.
Now, let’s say that your biannual staff turnover rate was 40% ((number of resignations per six months / total number of staff) * 100). On a team of five staff, you get about two resignations per six months, which costs you $40,000 per year.
After your coach’s help, you get that number down to just one resignation per six months (biannual turnover rate of 20%). That’s saved you $20,000 per year. If your coach cost $295 per week, that would cost you $15,340 per year.
((20,000 – 15,340)/15,340) * 100 = 30.38%
That’s not a bad ROI – not at all. But it’s also incomplete. We’re forgetting two important variables: the lifespan of the benefit, and other potential benefits.
If you stopped coaching after a year (or you got your coach to focus on other parts of the business), the systems they put in place would still be there. Calculated after five years, the ROI would look something more like this:
((100,000 – 15,340)/15,340) * 100 = 551.89%.
Now that’s an investment worth making.
And what about the other potential benefits? Coaching doesn’t occur in a vacuum. The systems that your coach helped you put in place to reduce turnover would almost certainly affect other areas, like labour productivity and brand image. You could theoretically measure the ROI of those areas too, and then aggregate the results to get a comprehensive, five-year picture of ROI.
Top-down vs. Bottom-up Quantitative Approaches
If you type “what’s the ROI of business coaching?” into Google, you’ll see a lot of websites talking about increases in profit or revenue. At first, this makes sense – after all, profit is the ultimate measure of business success.
But this ‘top-down’ approach is actually misleading. Unless you’re a very small business, it’s unlikely that your coach was the sole cause of revenue/profit changes. Let’s say a café in Melbourne was being coached during 2020. Regardless of how good their coach was, they would have seen profits plummet as a result of COVID lockdowns. That’s an extreme example, but external events (legislation changes, recessions, market saturation, new competitors, technology changes) happen all the time – as do internal events, like team members upskilling, new products being rolled out, or new partnerships being brokered.
Attributing every change in profit or revenue to your coach isn’t intellectually honest. A top-down approach to ROI is fine if you’re a solopreneur or micro-business (under four employees) and there haven’t been any significant internal/external changes, but most businesses should use a bottom-up approach when measuring ROI.
A bottom-up quantitative approach means starting with KPIs that are directly relevant to the business coach’s activities. For example, if your coach has been helping with your marketing, you might look at measuring things like opportunity pipeline and customer acquisition cost. We’ll talk more about how to find the right KPIs to measure in the next section.
Once you have your KPIs, you can work backwards to revenue or profit.
Setting KPIs to Measure
By now, it should be easy to see that, to assess the effectiveness of your business coach, you need to have a good grasp of business fundamentals. If you don’t know how to measure your current performance, it’s impossible to judge how your coach is affecting that performance.
There are hundreds of different KPIs across each business function, so you need to choose indicators that make sense for your individual situation. To help you get started, we’ve put together three common KPIs and their formulas for five essential business functions.
Keep in mind that working out the impact a coach has on your KPIs won’t necessarily give you ROI. For example, knowing that your coach reduced your customer churn rate from 30% to 20% won’t give you a dollar value – you’d have to do a bit more calculating to work it out.
Business
Gross Revenue- Suitable for: Every business
- Gross Revenue = (Total Sales Volume) * (Sales Price Per Unit
- Suitable for: Every business
- Net Profit = (Gross Profit) – ((Operating Expenses) + (Taxes))
- Suitable for: Every business
- Growth Rate = ((Current Period Revenue) – (Previous Period Revenue)) / (Previous Period Revenue) * 100
Marketing
Gross Revenue- Suitable for: E-commerce businesses and businesses without a sales function
- Gross Revenue = (Total Sales Volume) * (Sales Price Per Unit)
- Suitable for: Businesses with a sales function
- HIRO Pipeline = (Leads From a High-intent Source That Have: a Historical Win Rate of More Than 3% Lead-to-Win AND Reach a Deal Stage That Converts at More Than 25%) * (Average Deal Size)
- Suitable for: Every business
- CAC = ((Total Cost of Sales) + (Total Cost of Marketing)) / (Number of New Customers)
Sales
Gross Revenue- Suitable for: Every business
- Gross Revenue = (Total Sales Volume) * (Sales Price Per Unit)
- Suitable for: Businesses with a sales function
- Win Rate = (Closed-won Opportunities) / ((Closed-won Opportunities) + (Closed-lost Opportunities))
- Suitable for: Businesses with a sales function
- Average Deal Size = (Gross Revenue) / (Closed-won Opportunities)
Finance
Liquidity (Acid Ratio)- Suitable for: Every business
- Acid Ratio = ((Total Assets) – (Stock On Hand)) / ((Total Liabilities) – (Bank Overdraft))
- Suitable for: Every business
- Debt-to-asset Ratio = ((Total Liabilities) / (Total Assets)) * 100
- Suitable for: Every business
- Return on Equity = ((Net Profit Before Tax) / (Total Assets)) * 100
Customer Service
Churn Rate- Suitable for: Every business
- Churn Rate = ((Lost Customers at End of Period) / (Total Customers at Start of Period)) * 100
- Suitable for: Every business
- CSAT = ((Number of 4 and 5 Responses) / (Total Number of Responses)) * 100
- Note: Scores are collected via surveys to customers with the question “How would you rate your overall satisfaction with the service you received today?”. Scores at out of 5, with 1 being extremely dissatisfied and 5 being extremely satisfied. 4s and 5s are positive scores.
- Suitable for: Businesses with a support ticket system
- Average Resolution Time = (Total Resolution Time) / (Total Number of Resolved Requests)
HR
Turnover Rate- Suitable for: Every business
- Turnover Rate = ((Terminated Employees at End of Period) / (Total Employees at Start of Period)) * 100
- Suitable for: Every business
- Average Time to Hire = (Total Time to Hire From Positions Available to Positions Filled) / (Number of Positions Filled)
- Suitable for: Every business
- Average Cost Per Hire = (Total Cost to Fill Positions) / (Number of Positions Filled)
What’s a Good ROI for Business Coaching?
If you’re asking, “what’s a good ROI for coaching?”, you may as well ask, “how long is a piece of string?”, because the answer will always be: “It depends.”.
A business coach’s return on investment should be positive, but, beyond that, ROI varies from business to business. Generally, two rules of thumb are true:
- ROI goes up the less experienced the business operator is. A new small business owner will gain exponentially more from a business coach’s advice than a seasoned corporate executive.
- ROI from specific changes goes up the larger a business is. Because actions are repeated more the larger an organisation is, any change to those actions will have a cumulatively bigger effect.
Keep in mind that true ROI is very hard to measure. What if this slight bump in revenue lets your company survive the coming recession as your competitors crash and burn? What if your new HR practices let you hire that engineer with the incredible idea? What if better compliance management systems help you avoid a catastrophic accident?
The biggest benefits of investing in coaching aren’t foreseeable. As a holistic discipline, it touches every aspect of your business, and its effects are likely to keep rippling through your organisation for years to come.
Summary
Every executive and business owner should understand how their expenses support their goals. Knowing each expense’s ROI can be even more helpful, and business coaching is no different.
If you’re concerned that coaching isn’t a good use of your money, calculating ROI may help you decide whether to continue or stop. But quantifying a business coach’s exact impact on revenue isn’t easy – even if you know how to measure the right KPIs, tying those KPIs back to a dollar value can be tricky.
Sometimes, the best way to measure ROI is the gut check: “Do I feel as though my coach is still delivering business benefits?”. After all, you know your business better than anyone – and, if you feel as though your coach is helping you, they probably are. Click here to find a coach in your local area.
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