Do You Really Understand ROI?

Since the late 1800s, when companies started investing in promoting their products, they have been keen to know whether their dollars are reaping rewards or not. Hence, John Wanamaker’s now famous quote (often wrongly attributed to David Ogilvy): “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”

However, the idea of ROI is not confined to marketing. It is more of a financial principle. Its purpose in marketing is pretty straightforward, based on the economic theory that there are infinite wants and finite resources or means, à la Adam Smith and his treatise on the Wealth of Nations. To put it bluntly, there is only so much budget that a company or brand possesses. So where to use it is critical. For years, marketing students and practitioners have been measuring ROI specific to an area of marketing and the KPIs set. The benchmark was to measure ROI in terms of revenue versus the investment in marketing. This is because the top management and CFO often wanted to quantify the investment to return on the marketing spend.

Recently, I came across an interesting criticism of ROI as a metric on LinkedIn. Dale Harrison is a consultant at Inforda Life Sciences and (as far as I can tell) is not directly related to any marketing position. He does, however, work on the commercial development side of biotech, helping them with market positioning, regulatory distribution and new market entry. According to him, ROI fails for three reasons: previous marketing impacts current revenue; current marketing impacts future revenue; and marketing does not increase total revenue, only incremental revenue.

Based on the last statement, measuring marketing against total revenue is wrong. I remember when I worked in advertising and our client Johnson & Johnson decided to advertise after a hiatus of a decade. They wanted to achieve a 300% growth in sales – something that the campaign we did came very close to achieving, although it would be dishonest to claim it was advertising alone that led to the increase. A powerful brand such as Johnson & Johnson Baby Shampoo has a nostalgic value and association attached to it that prompts recall. Apart from this, the company had deployed their sales team as well. Therefore, it can be said that the uptick in sales was a result of a combination of activities.

Marketing and advertising will always have short- and long-term impacts. Calculating ROI is problematic not only because of cross-media exposure but also because of the ongoing effects of previous campaigns and marketing tactics. In accounting, there is the principle of the matching concept, which links an amount to the period during which it is paid or earned. In marketing, no such defined bifurcation is possible. Your marketing spend does not start working from day one, nor does it stop when you end the campaign or promotion.

Perhaps the biggest flaw with ROI is that it measures efficiency, not effectiveness. According to Harrison, effectiveness is doing things that produce incremental revenue; efficiency is about completing activities within the least amount of resources, be it time, money or people. His graph shows that marketing efficiency is about the number of marketing and engagement activities I can buy per dollar, whereas effectiveness is about increased mental availability, the propensity to buy, brand awareness, recall and trust. The caveat is that incremental revenue needs to be measured. As Harrison puts it, would they have bought it anyway, without the marketing activity?

Years ago, I came into contact with Philip Tiongson, a media planning professional in APAC. In his blog, Tiongson speaks about the difference between effectiveness and efficiency. He says that if you have a wall and you need to climb over it, efficiency is getting a ladder and climbing over the wall and effectiveness is finding the right spot to climb over the wall.

Let’s add another variable to the mix. In his latest piece in Marketing Week, Mark Ritson argues about the importance of measuring marketing and its impact over time. For him, marketing is not as important as Marketing(t) – which is the addition of the variable of time. “And we can apply the same calculation to marketing. We focus on a lot of stuff like product launches, ads and revenue growth that are of the moment. And we look at these things in almost total isolation from what happened before. In doing so, we miss the implication of time and the bigger picture that it paints. We talk too much about moments in marketing and not enough about Marketing(t).”

Ritson is offering a criticism of ROI, but in a roundabout way, in my view. Companies are zeroed in on the current and next quarter and fail to grasp the long term. Ritson says the role of the value of the brand over time lies in the valuations prepared by Interbrand (the world’s best-known brand valuation firm). Their evaluation involves three components: financial analysis, how much of the revenue was solely due to the brand value, and the value of the brand over time. As Ritson says, any useable brand valuation would be meaningless without the critical multiplier of time.

Those who follow Ritson will know that he is a believer in the ‘if it ain’t broke, don’t fix it’ mindset and argues that campaigns need to be consistent over time and that brands are not built in a day but need longevity with the same people working on them. The value of keeping a campaign almost unchanged for years was expounded by John Philip Jones in his book What’s in a Name? In fact, Boomers and Gen Xers will remember brand advertising remaining the same for years. Marketing content may be ephemeral, says Ritson, but adding the variable of time can add perspective and in the long run, growth and profits. Now that is the best ROI possible.

Tyrone Tellis is Senior Manager, Corporate Sales and PR, Bogo.
tyrone.tellis@gmail.com