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You are here: Home / Blog Posts / ROI Debate Still Rages

ROI Debate Still Rages

March 23, 2012 by bpsitemgr

When it comes to business, only three words really count. They are  – Return on Investment.

I have always been amazed that business executives in general and marketers in particular have managed to avoid measuring every marketing initiative. Sure, many companies measure the effectiveness of some below the line activities but in my view, marketing is every interaction between a company and its potential customers. That is literally 10-15 interactions in most businesses, and the ROI of very few of these is measured.

That is pretty pathetic and a serious indictment of the marketing profession. In such a competitive business environment it is critical that we know the ROI of every investment and every initiative taken by a company. Technology certainly gives you the tools to do so.

Measuring ROI on each marketing activity is critical to proving effectiveness, and competing inside your business for scarce resources. 63% of chief marketing officers think ROI will be the primary measure of their effectiveness by 2015.

But what was profoundly revealing was that 56% of CMOs, said they feel inadequately prepared to manage ROI. That means the pressure is on to calculate ROI in ways that yield accurate, supportable numbers, particularly pertaining to marketing expenditures.

Measuring ROI effectively will help marketers add value to their organizations and attract their fair share of resources.

The math is basic, but the components aren’t always easy to figure out. Any solid ROI calculation should measure revenue generated by the marketing campaign, profit margin on the items sold, and campaign and marketing-related expenses. Profit margin can be difficult for organizations to quantify because it incorporates the cost of operations, but it’s a necessary ingredient to calculate ROI accurately.

Keep in mind that to be able to quantify revenue generated by the marketing campaign, those campaigns need to have been designed to capture responses in the form of revenue from sales.

The simplest, but highly inaccurate way of measuring the return on Investment is simply the profit divided by the total cost of the campaign.

This simple ROI calculation is a solid metric for getting a quick indication of campaign performance. This enables you to compare campaigns or month by month performance.

That formula is also useful for measuring pilot marketing campaigns, but you must take into account that they likely have one off extraordinary expenses that wouldn’t apply once project efficiencies are captured in a full-blown campaign.

Though this simple ROI calculation is a good starting point and it keeps things reasonably simple, it lacks several very important enhancements. It often doesn’t factor in all of the costs associated with the campaign, and it doesn’t consider the impact of control groups. Both of those are required to evaluate the actual revenue generated by a campaign.

One of the reasons that few companies have marketing people on their board is because they are not seen to be as fiscally responsible as other departments in the company. Marketers will need to take a more advanced approach to ROI calculation and be more financially analytical if they want to be considered in the same league as the other departments in the company—and if they want to be evaluated by similar financial measures.

While the jury is still out on how detailed these ROI calculations need to be, there is consensus that it needs to be a lot more detailed and extensive than it is now. Some marketers hold the view that advanced ROI calculations should include all of the costs associated with having a marketing department: salaries, benefits, office space, computers, software, marketing’s share of the bills (heat, electricity, etc.), plus all of the direct campaign costs. All of those costs added together would give you the “cost of campaign” figure in the formula.

Also important in advanced approaches to calculating ROI is to factor in dollars generated and purchases generated from both the target group and a control group. Doing so will help you answer important questions, such as whether the average purchase dollar amount was higher from the target group or the control group… or whether the target group purchased at a higher rate than the control group.

Another view is that this also is too simplistic as factors such as competition responses to your initiatives need to be taken into account. Also in FMCG’s for example you would need to discount retailer incentives as you would likely have to pay them anyway. Listing fees are usually a one off that would also have to be discounted.

So, there is debate about the way to calculate ROI so that you get the most accurate result. I think this will vary depending on the industry and in my view a calculation to within a percent or two is close enough.

Just remember a couple of things. Include all of the costs involved. Too often we underestimate the real cost of goods and the actual cost of a promotion or campaign. Too often we ignore the true cost of the campaign which can make a hell of a difference to the ROI.

The other thing to take into account is the sales you would have received if you did no marketing. It would not be zero, so your ROI needs to count only the incremental increase in sales generated by the promotion.

The best part is that we are now at least beginning to take it seriously. Maybe marketers can regain their seat at the boardroom table.

 

 

Filed Under: Blog Posts

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