Metrics that matter, and those that don't: No.1: Marketing ROI
A short series on de-coding commercial growth and performance metrics, starting with Marketing ROI, sometimes referred to as MROI or ROMI, often used as a proxy for marketing performance, but is it useful, what does it really mean and when should it be used?
Marketers are under increasing pressure to deliver value for money, to demonstrate their worth, to create value, amplify revenue and reduce cost. In response, some have turned to 'Marketing ROI' as a measure of marketing performance.
Marketing ROI as a proxy for marketing performance
Unfortunately, 'Marketing ROI' as a measure of holistic marketing performance isn't a calculation that has much value or even one that can be made with any accuracy. There a few reasons for this:
Marketing is often poorly defined, or defined differently from business to business and often differently within a business, there is no generally accepted definition of marketing, which disciplines are 'in and which are not'. Consequently, when we're talking about 'Marketing ROI' as a general proxy for marketing performance it's not entirely clear what the investment is for or what are we investing in, the scope isn't clear enough.
In theory and in practice marketing is a complex ongoing set of interconnected yet discrete process between many inter-dependent disciplines. Many of these processes are 'always-on' and have no discernible start or end. In other words, there's no 'period', no context or time parameters within which an investment can be made, no clear period within which attributable returns can be measured.
Attribution of costs, expense, investment, revenue and returns can't be determined with any reasonable accuracy. More often than not effective marketing is a consequence of effort from more than just the marketing function. There are costs incurred elsewhere in the business that should reasonably be attributed to marketing success such as sales, account management and customer support. It's almost impossible to assign overall returns from marketing to specific disciplines without a clear and accepted definition of marketing and rigorous process models to support this definition. More often than not these definitions and process models are not well developed.
Campaign ROI is different, it's time-based or period based, there's a start and end to the campaign. There should be clear parameters defining a campaign, timelines, targets, anticipated outcomes and impact. Advances in email and digital tracking, social assignation, reach analytics have made a real contribution to the prospects of measuring campaign, even advertising (especially 'on-line') Campaign ROI a realistic metric. In short, the investment can be identified and subsequent returns measured over a period of time. Theoretically then, ROI for well planned and tracked campaigns, especially in a digital or social context where there is plenty accurate data is possible, as long as the actual costs, revenue and returns in a specific period can be clearly attributed to investment in the campaign. But why would you?
If you're interested in maximising revenue, then measure that, if it's profitability or cash flow then measure that, neither of these are ROI. If you've gone to the trouble of collecting accurate, attributable information to allow you to measure Campaign ROI, then measure Discounted Cash Flow (DCF) or payback, which use much of the same information, but are much more useful metrics.
Why use ROI anyway?
Even where there is clear evidence that ROI could be measured, it's just not a great tool. For a start there's no reliable comparison from campaign to campaign. Just because one campaign has a better ratio than the other doesn't really mean anything as the investment, timelines, targets and outcomes are more then likely different. Unless you're running exactly the same campaign again and again ROI comparison isn't that useful, in fact it might be misleading.
There's a lot of confusion about ROI and it's use in marketing. When someone talks about using ROI in a marketing context is that what they really mean? Do they mean ROI, or ROMI, or ROAS, or maximising returns, do they mean profit from a campaign, revenue less expense or do they really mean returns from an investment. Are they confusing cost and expense with investment, do they mean the point at which they get a return on their investment? As Tim Ambler said in his seminal book: Marketing and the Bottom Line, (which every marketer should read):
"When people talk about ROI from marketing, they usually mean profit return after deducting the cost of the campaign: it is return minus investment, not return divided by investment...one response has been that the ratio is still useful for comparing alternative uses...in fact if the I is constant, then R-I peaks at the same point R/I does, so the ratio is redundant at best and possibly misleading because the immediate reaction to a high ratio is the supposition that more investment would produce the same ratio again"
An unhealthy focus on ROI as a marketing metric can encourage a kind of short term marketing myopia, as Mark Ritson pointed out using a quote from Peter Field in a Marketing Week article:
"..Field stresses that both he and his collaborator Les Binet, head of effectiveness at Adam & Eve DDB, see ROI as an “incredibly dangerous metric”. He believes using ROI as a decision metric..... is dangerous because ultimately the best way to maximise ROI is to spend less money."
Where real 'marketing investment' is made
ROI is a short term marketing measure at best, it may look great but the performance doesn't scale. Quite often it's more focused on P&L activity, wrongly applied and focused on costs and expenditure rather than investment. As such it can often be a distraction from brand or relationship building, reputation management and generation of capital value through marketing where true investment is likely to be being made, where returns are expected over time, where assets are being built. But, there are challenges here too, in attributing returns to specific capital assets and intellectual capital like brand.
If marketers had more insight into the management of capital assets, of which they are custodians, some of these attribution challenges may be overcome. Unfortunately too much marketing is focused on tactical P&L activity, short term gain, rather than building capital value, and more often than not, the systems to effectively manage intellectual capital aren't in place, but that's another story.
Donaldson Brown invented ROI to measure the investment return on capital projects; new businesses and products, truly investments, where there is a clear period where investments are made and where returns or cost savings could be expected - this is the context in which ROI works. Other than this capital reporting context it's arguably the case that accountants, treasurers and other analysis have abandoned ROI in favour of DCF and payback.
ROI in marketing appears almost useless by comparison to other available measures, yet it is by far the most talked about in marketing performance management today. Outside capital management or true investment management it has little value. It's perhaps time we all started talking about better, more useful alternatives rather than the somewhat jaded notion of 'Marketing ROI'. Explaining marketing contribution through DCF, payback and capital value as part of a more informed scorecard can only help enhance the reputation of marketing and set a new agenda for commercial performance monitoring.