OPINION Are you ROI-driven? Maybe you are looking at the wrong thing

Which do you prefer?

• Carrying out your marketing activities based on gut instinct
• Carrying out your marketing activities and making decisions based on return on investment (ROI) rather than intuition or opinions?

Not hard to answer, I would imagine return on investment – ROI. It sounds like it’s the right thing to do. Top management wants the “bottom line” on marketing’s contribution to business goals, and ROI seems to be the right yardstick. 

Linking marketing to financial performance is the sole role of marketing, otherwise, what are we doing? 

Using words like ROI conveys a veil of financial authority.

However, I say ‘no’ to using ROI as a key measure – ROI should not be used as an advertising metric. 

And I am not the only one.

The origins of ROI

Let’s start at the beginning — with definitions: what is marketing ROI?

 Simply put, it is a way of measuring the return on investment from the amount a company spends on marketing.

 Professor Byron Sharp of the Ehrenger-Bass Institute in Australia describes ROI as “a simple equation that results in a percentage….the contribution to profits that is returned from the marketing ‘investment’ and divide it by the cost of the investment: ROI (%) = profit contribution/marketing costs.”

What are the origins of ROI? ROI’s has its origin in evaluating one-time capital projects in the world of finance. Why is ROI front-and-centre these days? 

The power of platforms such as Google and Facebook. Just as they brought back the notion of funnels (originating in the late 1890s as A-I-D-A — awareness, interest, desire, action), they introduced the notion of ROI through their advertising channels. Digital advertising is easy to measure in terms of return on that spend compared to outdoor advertising or PR. Digital has always been held to a higher standard because people conflate more measurable with more accountable.

The Problem with ROI

“ROI is not so much understood as waved about as a totem to ward off evil spirits, namely those trying to cut advertising expenditure: ‘We are using ROI to establish the budget, so leave us alone.’   The totemic use of ROI may work for a time, just as placebos work in medicine.”

This is a quote from Professor Tim Ambler who has written lots of seminal marketing articles and books.  This particular quote is from a 2004 article called “ROI Is Dead: Now Bury It” ^[1]

Professor Ambler gives lots of reasons to support his case. Here are just seven of them: 

1. “ROI is the net profit return (R) divided by the advertising investment (I). This arithmetic difference between subtraction and division lies at the heart of the problems with using ROI as a performance metric.”
2. “ROI was devised for assessing capital projects where the investment is made once and the returns flow during the following years. ”
3. “Advertising is an investment in the future cash flow; and the benefits often extend beyond the current year. At the same time, it is not an investment in the capital project sense.”
4. “Advertising expenditure is usually continuous from year to year and, mostly, maintains the brand and the bottom line. It belongs in the P+L, not the balance sheet.”
5. “ROI does not cope well with ongoing future budgets: it is the short-term return divided by the short-term advertising expenditure.”
6. “ROI gives a false picture, partly as a result of excluding longer-term cash flows, the effects on the dynamism of the business and brand equity.”
7. “In fact, a drive for increased ROI will ultimately destroy any business, because the cash-generating activity is penalised relative to short-term profit.”
   

Professor Ambler points out that stretching to improve ROI is sub-optimal in terms of the firm’s goals (profitability, cash flow or shareholder value). 

As CMO Kate Cox writes “The best way to improve your ROI is to reduce your marketing spend to zero. The best way to increase your future new revenues (driven by marketing) is to increase your marketing expenditure. Both are correct statements : firms need to make a decision about how they want to grow and whether marketing is part of the puzzle.

How ROI falls short

Let’s look at why ROI as normally discussed falls short in more detail.

There is a reason that the world of marketing talks about the notion of effectiveness as the be-all-and-end all of marketing because the role of marketing is about delivering customers and delivering revenue — profitably. However, ROI falls well short of helping us understand marketing’s contribution to business goals — in other words, its effectiveness, or how it’s effectiveness can be improved.

To gauge and improve marketing effectiveness, we must factor in the strategic intent of all marketing investments a company makes, not just the ROI or two or three channels that the digital behemoths of Silicon Valley have arbitrarily decided to be included in their technology stack. 

ROI being a poor indicator is that marketing expenditure on Google or Meta is only a part of a company’s total expenditure. What matters is how effective it is, not how efficient it is. 

An ROI of 150% on a €1m campaign is €500,000, while an amazing 500% ROI on a €10,000 campaign is still only €40,000.

ROI measurement has a particularly acute problem on these digital channels due to attribution. From Google or Facebook’s worldview, they want you to attribute the sale to the stream of click actions by your customer on their channels. Great, good for them. But as we all know correlation is not causation. With different initiatives happening across different channels at the same time, how do you measure a multi-touch customer journey that represents the sum of so many diverse marketing interactions which might include PR, sampling or Retail Media?

ROI also ignores the basic tenets of marketing science. At the core of an any marketing effectiveness discussion is the concept of growth. Professor Byron Sharp points to decades of research that shows that focussing on ROI tends to encourage campaigns that target existing customer who show higher ROI because many of the sales aren’t really extra sales but sales that would have happened anyway. Sharp posits that a brand’s consumers aren’t as loyal as we may think — they come and go, and as a result, if you are looking to grow, you need broader reach and encourage light buyers rather than depending on existing customers.

ROI metrics also do not align success metrics with the notion of customer lifetime value, customer profitability or customer retention. 

In other words, ROI — as we currently talk about it — drives short term thinking.

Forget ROI-driven, become insights driven

A much better frame of reference is to ignore the measures of ROI within Google, Meta or Retail Media Networks and become insights and data-driven by keeping score of all major marketing activities such as:

• Brand and customer metrics: brand awareness such as top-of-mind, ad recall, prompted/unprompted, customer churn rate, customer lifetime-value, revenue per customer
• Financial metrics: revenue per customer, profit per customer, average transaction value, market share
• Media Metrics: impressions, click through rate, viewability, share of voice
• Performance or campaign metrics: customer acquisition cost, cost-per-click, conversion rate, website bounce rate, cart abandonment rate, new customer sign-ups, etc
• Sales Insight metrics: sales lift, attribution, A/B testing,

The rationale for this is simple: 

• You can then translate marketing activities into financial results that affect the bottom line by demonstrating how much you are delivering, which, in turn, can certainly help access more funds from the financial purse strings.
• You can learn the art of what really matters: insight. Metrics are numbers that you see in spreadsheets and are a fixed point in time. Insights describe how those numbers behave to form a trend. Insights are over time; metrics are about a point in time — in the past.

A new set of questions

Maybe it’s time to stop talking about ROI as it currently is and create some new questions to be answered. Or as Professor Tim Ambler puts it: If advertisers seek respect for their proposals, then they should use respectable metrics.

Here are just five I can think of. 

1. Are we clear on what we are measuring with Retail Media?
2. Do we have the same definitions in place for what we are measuring with retail media?
3. Do we know what we really mean where we are talking about:
   1. ROI
   1. ROAS
   1. iROAS
   1. Incrementality
   1. New to Brand
   1. New to Category
4. Are we measuring the right thing?
5. Are we asking the right questions about how effective our retail media expenditure is?

I am sure there are more to be added but lets start here.

^[1] https://www.warc.com/fulltext/Admap/79369.htm