This is an old point, well-made in Marketing in the Era of Accountability ten years ago, but still one rarely heeded by marketers in the US. So I’m going to make it again (and again) until they start paying attention.
ROI is the mathematical function of two variables: the numerator and the denominator. It is, in effect, a ratio between the two. This is the problem with setting ROI as a marketing goal. A very small denominator (i.e. spend) can lead to an enormous ROI. That isn’t necessarily the best choice for your business, however.
Here’s an example: you can spend $10k and make $100k in return, a 10:1 ROI*. Or, you could spend $10m and make $12m in return. This second scenario returns a lowly 20% (compared to the 1000%) in the first scenario. However, the yield is $2m in the second scenario, compared to $90k in the first. Which would you prefer?
The challenge of picking the correct marketing metrics is an important one. These days there are myriad data points we can track and measure. But tracking and measurement is not the issue. A lot of the art of our craft, at this time, is understanding what is worth measuring and why. I don’t meet many people who have a clear understanding of that.
This article is not to say ROI isn’t valuable. Of course, it can be. It absolutely should not be, however, the goal of marketing investment nor the key data point.
Slashing budgets is likely to increase ROI. That doesn’t necessarily make it a good strategy. You can also boost ROI by going narrow: retargeting, specific search terms, discounting, and going after audiences with a high propensity to act now. Because they’re narrower, however, these opportunities can also mean lower spend and ‘artificially’ boosting ROI.
Critically, all this must be understood in light of what marketing science tells us is necessary for growth: targeting a broad swath of potential customers (likely including people who haven’t purchased your product before). It also must be understood in the context of how marketing creates value. These days you can easily throw dollars at Facebook or Google and drive some growth. Where marketing really proves its value, however, is when it lifts a business to a new level. In these examples, the ROI from marketing can be over 100%.
When this happens, however, a few factors come together: increasing volume sales is typically not enough – the really big wins come from the synergy of doing this at the same time as increasing profitability. Often that means a decrease in price elasticity. A smart balance of branding and activation, plus ideas which resonate deeply with the consumer, are what are required to really extract deep value from marketing – not just a high ROI.
The bottom line is too much focus on ROI damages long-term growth prospects. Binet & Field, in their ongoing excellent work, cite increasing short-termism as one of the most significant risks to marketers and companies today.
The solutions for most advertisers include: adding broader reach channels to the media strategy, setting up a proper measurement framework reflecting the different functions of the various aspects of the marketing mix, and employing a robust test structure to re-assess the value, price, and role of targeting (which is often over-priced as well as over-hyped.) We’d be happy to help!
*Exactly how ROI is calculated is a more complicated topic, not in scope for this article. However, 10:1 is technically NOT the right number here. For example, ROI calculations should at least reflect profit from the investment, rather than revenue, and should incorporate the incremental COGS. Nonetheless, 10:1 serves to simplify and illustrate the point in this article.