Another article on the futility of Marketing ROI as a meaningful measure of marketing performance.
Are you trying to measure marketing ROI? Why are you trying to measure marketing ROI? What are you planning to do with the results? Should you really be focused on Marketing ROI as a primary metric for marketing?
In a recent study by Marketing Week, marketers voted Marketing ROI as the top metric they thought the C-Suite wanted, ROI - Top Effectiveness Metric Demanded by C-Suite. (Thanks for the prompt Mark Peacock...). It is astounding that almost half of marketers (48.4%) say ROI is the most important metric for their CEO, CFO and board members think. Thank goodness just under 52% don't!
Calculating ROI
To be clear, Return on Investment (ROI) is calculated by dividing the Net Return on Investment by the Cost of Investment multiplied by 100% or Final Value of Investment, less Initial Value of Investment, then the result divided Cost of Investment multiplied by 100%. It's about investment, costs of investment and returns.
No one thinks it's useful
Despite continual prompts to the contrary from academics, industry bodies and consultants many marketers, particularly in B2B, still have an unhealthy obsession with marketing ROI, and are insistent on trying to measure it.
Here's what some of the most respected people in marketing have to say:
"ROI tends to inversely correlate with profit growth, as due to diminishing returns ROI decreases as you spend more, and increases as you spend less. So the easiest way to increase your ROI is to decrease your media spend. ROI can send you broke. Your most profitable customer is your next one.", Byron Sharp, courtesy of Tom Roach, Marketing Week.
"It is odd that ROI has taken such a prominent role in the recent calls for accountability. Advertisers should indeed be able to justify the expenditure in financial terms, ideally the impact on the bottom line. One can call that productivity or payback that is the return from (minus) expenditure, but the ROI ratio is misleading." Tim Ambler, London Business School
"Don’t optimise ROI, optimise net profit. The optimum ROI budget is always zero. If you optimise ROI you will destroy your business." Les Binet, Adam & Eve DDB, marketing Week.
"While ROI is “absolutely” the correct way to measure short-term performance marketing, marketers need to stop trying to measure the ROI of long-term brand spend. Let’s stop measuring the long of it and brand building with stupidly complex, just ridiculous dollar estimates,” Mark Ritson, Marketing Week.
ROI is not the greatest metric for measuring investment success, many financial and investment analysts have abandoned it, but Marketing ROI is just an idiotic fool’s errand.
Here’s a simple scenario to explain why.
A marketer, let’s call him Farquhar, focuses on trying to measure marketing ROI diligently collecting information about costs, expenditure and revenue.
Unduly concerned about what constitutes investment, investment costs, time to return, cost and expenditure allocation, or relative contribution of marketing to revenue or asset value Farquhar uses all the data he can get his hands on to isolate what he thinks is investment and what he thinks are costs of investment for the quarter. Farquhar applies the ROI calculation and comes up with a number, a neat little percentage, marketing ROI for the quarter. Excitedly he goes to the CFO and proclaims he’s calculated marketing ROI.
The CFO looks at Farquhar with a blank expression.
The marketer says "Surely this is important, I’ve calculated marketing ROI, we can use it to justify marketing and measure its contribution?”.
The CFO looks at Farquhar with a blank expression.
Farquhar asks, “why aren’t you excited about this, don’t you think this is important?”
The CFO calmly says, “No, I’m not excited and it’s not important”.
Farquhar asks “Why?”.
The CFO says, “I appreciate you’ve gone to a lot of effort to try and calculate marketing ROI, but I doubt it’s an accurate calculation, marketing contains many different programmes running over different periods of time, it also has long term investment programmes in assets like brand and short term expenditure or cost, what you might refer to as costs and expenditure associated with 'activation' programmes.
"Marketing has no start or end, it's a continuous stream, a constant flow of programmes and activity. Unlike a discrete campaign which does have a defined period, start and end, for which you could have calculated ROI. Instead of ROI you might want to think about NPV and Discounted Cash Flow, or payback, maybe even net profitability of campaigns. However, you simply can’t calculate ROI for marketing”.
The CFO then goes on to say, “What’s more, comparison between one investment in one period and another period is meaningless unless the conditions in each period are the same, marketing isn’t like that, it’s quite dynamic”, a slight pause, "marketing is also part investment and asset building and part expense or cost and revenue building, which bit are you calculating ROI on?". “What you’ve clearly demonstrated is that you don’t understand the meaning, purpose or calculation of ROI”, and then she says, “even if you could calculate marketing ROI and your calculations were accurate, marketing ROI doesn’t matter to me, to be frank, the world of financial and investment performance management has moved on from ROI as a useful metric, except in very specific investment scenarios”.
She then says “If you’re talking about ROI being a broader concept, a contribution in a wider non-financial sense, then don’t use the term ROI”
Which is quickly followed by,
“I’m not interested in marketing ROI as a metric and I’m not interested in marketing wasting time to justify its own existence. If I thought for a minute marketing could not justify its existence, that would be a whole other world of pain”.
Farquhar asks, “Well what is important to you?”
The CFO responds by saying “What’s important to me is the contribution marketing is making to the premium we can charge over and above our costs and expenditure, what’s important to me is how marketing drives sales velocity, volume and the confidence we can have in the quality and amount of future revenue, what’s important to me is how marketing drives market share, reach, new opportunity and acquisition, what’s important to me is how marketing is building differential advantage, intangible asset value, brand, reputation, and intellectual capital that’s driving up our share price and capital value”. The CFO finishes with, “I know marketing is important, there are many far more useful ways to measure its contribution to the business, but I don’t care about marketing ROI, there are far better, more accurate and informative metrics and measures that could be used”
Just then, the CEO walks in. “Hi, what’s going on here?”, the CFO says, ”just talking through marketing performance measurement and contribution”. “Great stuff” says the CEO, “ Hope you didn’t get side-tracked by marketing ROI, we need to be well beyond that, we have strategic capability, superior margin and a brand to build”
What do you think?
Never mind if you think you can calculate marketing ROI, ask yourself is it the right thing to do, is it metric that matters would you be better looking at something else that clearly show the great contribution marketing makes?
For more have a look at: Metrics that matter, and those that don't: No.1: Marketing ROI