Which do you prefer?
· Carrying out your marketing activities based on gut instinct
· Carrying out your marketing activities and making decisions based on ROI rather than intuition or opinions?
Not hard to answer, I would imagine. Indeed, it’s hard to have a marketing conversation these days without hearing about 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, why do we exist? Using words like ROI conveys a veil of financial authority.
However, I say ‘no’ to using ROI — at least in the ways, it is bandied about today- as a key measure. I know a bit about marketing. I’ve got over 25 years’ marketing experience working for world-famous brands in UK, Ireland and Australia. I’ve taught over 1000 students over the last ten years about digital marketing, and still do 100+ contact hours a year. I’ve also run marketing workshops and training for the likes of Facebook, Experian and Britvic in the last six months. And, I founded and now programme the largest marketing conference in Ireland, DMX Dublin — since 2013. I’ve an MBA and MSc in Marketing.
It’s not that the idea of ROI is bad. It’s just that ROI in a marketing context is just one aspect of what marketing is about.
Let’s start at the beginning — with definitions: what is marketing ROI? ‘A way of measuring the return on investment from the amount a company spends on marketing. Jill Avery, a lecturer in Harvard, describes it as ‘assessing the return of a specific marketing programme, or the firm’s overall marketing mix’. 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. But marketing is not a one-time capital project, as Dominique Hanssens, Professor of Marketing at UCLA.
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.
The outcome of all this is that marketers rarely mean ROI when they say ROI. Real ROI is certainly an important metric for marketing to work out:
· How to justifying marketing spend
· What to spend the budget on
· To hold themselves accountable and creating rigor in decision making
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 Facebook 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.
The real problem behind all of this is that too many people working in digital marketing talk about channels such as Google AdWords or Facebook as ‘marketing’. They are not that. They are tools for customer acquisition or channels of communication. The 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, point-of-sale displays or sampling?
ROI also ignores the basic tenets of marketing science. At the core of an any marketing effectiveness discussion is the concept of growth. Byron Sharp, professor of marketing science and author of the seminal marketing book “How Brands Grow” 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 measures also ignore long-term initiatives like brand awareness, customer relationships or customer retention that can take months or years before marketers can see the full impact. ROI metrics within Google and Facebook do not align success metrics with the notion of customer lifetime value, customer profitability or customer retention. ROI — as we currently talk about it — drives short term thinking.
Forget ROI-Driven, Become Data-Driven
Good marketing starts with a decision: a decision to measure marketing activities as accurately as possible and designing the process to manage it. In other words, using metrics to measure the results of your marketing initiatives to improve outcomes, so you can make decisions for your brand by backing it up with rational information.
However, the typically discussion around ROI is misleading. Marketing ROI is the practice of attributing profit and revenue growth to the impact marketing initiatives. That is what the discipline of marketing is about. It is not about winning creative awards, content marketing or telling storytelling or having a great ‘Instagram game’. None of these are marketing. That’s are actions within a channel. And if these channels are talking about ROI, they are measuring the degree to which that tactic was useful in a defined period of time or for a campaign, not true marketing ROI.
A much better frame of reference for marketers is to ignore the measures of ROI within Google and Facebook and focus on being data-driven. Being data-driven is about keeping score of all major marketing activities such as:
· Brand and customer metrics: brand awareness such as top-of-mind, prompted/unprompted, customer churn rate, customer lifetime-value, net promoter score, revenue per customer
· Financial metrics: revenue per customer, profit per customer, average transaction value, market share
· Performance or campaign metrics: customer acquisition cost, cost-per-click, conversion rate, website bounce rate, cart abandonment rate, new customer sign-ups, media mentions, number of new blog posts, etc
· Insight metrics: attribution, A/B testing.
Here are three reasons why being data-driven is much way of thinking for today’s marketers:
· Being data-driven means that you translate marketing activities into financial results that affect the corporate bottom line. Data driven marketing helps you demonstrate how much marketing is delivering, which, in turn, can certainly help access more funds from the financial purse strings.
· Tracking your work through data means you can learn the art of what really matters: insight. There is a difference between data and insight. Data and 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.
· Data enables creativity: being focused on the facts does not mean there is a ‘church and state’ divide between being data driven and being creative. There are, in fact, lots of data to prove that creativity is not just compatible with being data-driven — indeed, data can drive better creative, which in turn, significantly improves marketing effectiveness. Sometimes, we de-link creativity and marketing effective because creativity is not the language of the CFO or the board. Today, we have the data that proves creativity is a factor in driving business performance.
As Paul Dervan, author of Running With Foxes, and CMO of the Irish National Lottery points out: ‘a lot of wonderful creative starts with data — as in information. What good creatives and planners do is get under the skin of the data: they go beyond it, trying to understand the why — the motivations driving the behaviour that is turning up as data’.
The link between data and creativity has been shown over and over again by the ‘godfathers of effectiveness’, Les Binet and Peter Field. They have shown using actual data that that ‘communications models that use emotional appeal (emotional involvement, fame and ‘more complex’ models) are more likely to yield strong business results than rationally based models of persuasion’, and point out that this is in line with much historic research on the subject of emotional approaches.
Maybe it’s time to stop talking about ROI as it currently is, and create some new questions to be answered:
· How good is our data?
· Are we measuring the right thing?
· Are we asking the right questions about how effective our marketing really is?