ROI might not be the right way to measure the impact of your marketing.
Manly because it is routinely misused and misunderstood.
Using ROI to gauge marketing impact can severely distort the true value that marketing is delivering for your organization. Sure, it’s hard to have a marketing measurement conversation with out ROI coming up. It is after all one of the most used marketing metrics. But is return on investment really an accurate way to measure marketing effectiveness? In many cases the answer is no.
The concept certainly is sound and marketing should show a return on the investments it makes. Linking marketing to financial performance and business results is absolutely critical.
Most people use ROI wrong.
The problem is most people who use ROI in a marketing context, probably aren’t using it correctly or really mean something else.
ROI’s use is evaluating one-time capital projects. Is marketing a one time capital project? Clearly not!
We want everyone to view a marketing budget as something that will pay dividends, but technically all marketing expenditures are an expense. Marketing costs are a profit and loss item, not a balance sheet item.
We would all love to quantify marketing performance with a single number. However, ROI is a ratio. Therefor, you can only make ROI comparisons if the spending amounts are the same. It is not only a function of the medium, but also of the investment in that medium.
Also maximum ROI does not necessary produce maximum profit, due to the law of diminishing returns. After a certain investment level, marketing effectiveness declines. But that does not mean you should stop investing.
Profits may still rise, just not as fast.
Should you stop spending when ROI drops?
Should you stop spending if ROI drops and you continue to produce bigger profits? Most likely not.
The point at which you should stop or make a change depends on metric known as return of the last incremental amount spent, not the overall ROI.
Return on marginal investment (ROMI)
If you want to use a return measure to gauge marketing effectiveness, ROMI may be better option. ROMI is a metric used to measure the overall effectiveness of a marketing campaign to help marketers make better decisions about allocating future investments. ROMI is typically used in online marketing. Athough integrated campaigns that span print, broadcast and social media may also rely on it for determining overall success.
Calculating ROMI: Short terms vs long term
Short term ROMI is used as a simple metric measuring the dollars of revenue for every dollar of marketing spent.
Sales revenue/marketing cost
Direct measures of the short-term ROMI are often criticized since it does not include the long-term brand building value of marketing activities.
Long term ROMI can be used to determine other less tangible aspects of marketing effectiveness. For example, ROMI could be used to determine the incremental value of marketing as it pertains to increased brand awareness.
Long term ROMI models will often draw on customer lifetime value (CLV). CLV demonstrate the long term value of incremental customer acquisition or reduced churn rate.
There are more sophisticated marketing mix models that include multi-year long term ROMI by including CLV type analysis and brand valuation techniques.
What you really need to know when it comes to ROMI and ROI
The only thing you really need to know is whether ROMI is positive or negative. Put another way, are you under spending in a given category or overspending… Or are you getting it just right with an ROMI of zero.
An impressive ROI attached to a specific activity probably means nothing if broader marketing goals aren’t being met. Focusing solely on dollar in compared to dollars out ignores a complex web of interactions that happen in between. However ROI still has its place
Tacking complex interactions
The paths consumers take to your website or business location are more complex than ever, often involving a variety of online communities and on multiple devices. Your nex loyal customer might stumble across your display ad on a newsletter you’ve never heard about, or revive a recommendation from a co-work in a Slack channel.
But these off-domain and cross device brand interactions are equally , if not more, important to track and understand. With this data, you can identify more sources of qualified traffic and determine the best experiences for conversion.
In the next article I will share with you the where and how to track these critical events so that you can understand your customer’s journey before they even get to your place of business.