There are many businesses every month that find the need to invest in loss prevention equipment. Some purchase elaborate camera systems, other purchase computer programs to track transactions, while others simply buy sensor tags. If you are planning on purchasing loss prevention equipment, you need to figure out your ROI on the purchase first.
There is no amount of loss prevention equipment that will completely eliminate your chances of losses from theft. Even the stores that spend the most on loss prevention (Best Buy, Target, Radio Shack, Wal-Mart etc.) still end up having theft every year. The first step in figuring out your loss prevention equipment ROI is to realize that you are not going to eliminate all theft.
The second step in figuring out your loss prevention equipment ROI is to decide what a significant reduction in theft losses would be for you. For most of my clients over the years that are looking at purchasing loss prevention equipment, I have suggested that a one third reduction in theft is something that a company should shoot for when first figuring in loss prevention equipment ROI.
How to Mathematically Figure Out Loss Prevention Equipment ROI
Let’s say for the sake of argument that the loss prevention equipment that you are considering for your store costs $1,000. Let’s also say that your annual known theft is $60,000. If we are looking at a 33% deduction in your known theft due to this equipment, it would come to $20,000. Divide the total cost of the equipment by one third of your known theft.
Essentially, your $1,000 purchase will pay for itself in 1/20th of a year. Your loss prevention equipment ROI is twenty times what you paid for it?
Easier Way to Figure Out Your ROI
An easier way to figure this is that loss prevention equipment should pay for itself in the first year. If you adjusted known theft is higher than the cost of the equipment, your loss prevention equipment ROI is going to be negative. If the cost of the equipment is higher, you are going to have a negative ROI.
There are many companies that I have seen that would have a negative loss prevention equipment ROI. This would be caused by a company buying equipment that was more valuable than the overall loss. For example, I once had a client that wanted to purchase $7,500 in loss prevention equipment. His annual known theft was about $350 (he owned a specialized small goods store). It would have taken 21 years for his investment to pay off if it eliminated all theft. If it cut it by 33%, it would take over 65 years to pay for itself!
Keep these ideas in mind if you go out and look at loss prevention equipment. All purchases of this nature should figure positively into the equation of loss prevention ROI. Make sure that you are reaping the benefits of reduced losses, not paying for extravagant loss prevention equipment that you don’t need.