Handcuffed by ROI

Return on investment…is there another business acronym that receives more attention than the venerable yet often misunderstood, misused and abused ROI? I don’t think so. On the surface, it’s a very intuitive, straight-forward method of determining whether something is worth the expense. From a marketing standpoint, take the net amount of money you made from any given initiative, divide it by the amount of money you spent on marketing, and bingo: ROI.

For example, if Jimmy’s lemonade stand made $10, but he only spent $5 on his wooden sign and flyers, his marketing yielded 100 percent ROI: (10-5)/5=1.

5589180516_a14e35f38bThe problem with ROI is that the world doesn’t work this way. First, not everything can be accounted for in the ROI equation. How much does buying the newest version of the Adobe suite contribute to marketing success or failure? Conducting study groups in eight markets instead of nine? Farming out a video production vs. doing it in-house? Furthermore, how much time would it take to attribute all of these costs (or savings) to ROI, and how accurate could one be?

Second, ROI can stifle creativity, collaboration and innovation. When everything must be justified by ROI, employees lose the ability to do things that may lead to bold new ideas and new ways of thinking about things. What’s the ROI of a walk in the park to clear one’s head, or a gym membership? How many great ideas come to people in the shower, over lunch, in the hallway or during a game of racquetball?

Lastly, it’s been commonplace in business to assume that every marketing activity exists in a vacuum. A TV ad runs and sales go up or down correspondingly. A newspaper campaign hits, and the manufacturing floor gets busy or slows down. Each marketing avenue has a cause and effect. A half-century ago, this may have been true. But as Wes Nichols, cofounder and CEO of MarketShare, said in the cover story of the March 2013 issue of Harvard Business Review, “One of our clients, a consumer electronics giant, had long gauged its advertising impact one medium at a time. As most businesses still do, it measured how its TV, print, radio, and online ads each functioned independently to drive sales. The company hadn’t grasped the notion that ads increasingly interact. For instance, a TV spot can prompt a Google search that leads to a click-through on a display ad that, ultimately, ends in a sale.”

By ignoring how marketing strategies interact, businesses can incorrectly assume that some initiatives are a waste of money, while others are magic bullets that drive miraculous sales. The end result can be a grossly inaccurate picture of how the company’s marketing is performing. Nichols adds, “This still-common practice, what we call swim-lane measurement, explains why marketers often misattribute specific outcomes to their marketing activities and why finance tends to doubt the value of marketing. As one CFO of a Fortune 200 company told me, ‘When I add up the ROIs from each of our silos, the company appears twice as big as it actually is.’”

What to do? Stay tuned. Next week, I’ll look at some new analytical methods that can tease out ROI contributions and maybe even show that sending the creative staff to a wilderness leadership program wasn’t a waste of money after all.

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