Return on Investment: Everybody’s talking about ROI, but not everyone agrees on what it is.
Given the various ways that I’ve heard marketers bandy about the term ROI, I wonder how many of them really understand the concept, and how many just use the term as a buzzword.
There’s certainly a disconnect between the way many marketers use of the term and the traditional definition embraced by CEOs and CFOs.
A study by The Fournaise Group in 2012 revealed that:
- 75 percent of CEOs think marketers misunderstand (and misuse) the “real business” definition of the words “Results,” “ROI” and “Performance” and, therefore, do not adequately speak the language of their top management.
- 82 percent of B-to-C CEOs would like B-to-C ROI Marketers to focus on tracking, reporting and, very importantly, boosting four Key Marketing Performance Indicators: Sell-in, Sell-out, Market Share and Marketing ROI (defined as the correlation between marketing spending and the gross profit generated from it).
So CEOs clearly want marketers to get on board with the true definition of marketing ROI. You can calculate marketing ROI in two different ways:
1. Simple ROI:
Revenue attributed to Marketing Programs ÷ Marketing Costs
2. Incremental ROI:
(Revenue attributed to Marketing Programs – Marketing Costs) ÷ Marketing Costs
Either of these definitions is consistent with the classic direct marketing principles of Customer Lifetime Value (the “R”) and Allowable Acquisition Cost (the “I”).
Back in 2004, the Association of National Advertisers, in conjunction with Forrester Research, did a survey on the definition of ROI where respondents could select from a menu of meanings. The results showed that there was no definitive definition of ROI, but rather, that marketers attribute up to five different definitions of the term and many use it to refer to many (or any) marketing metrics.
Member Survey of Association of National Advertisers on meaning of ROI
(multiple responses allowed)
- 66 percent Incremental sales revenue generated by marketing activities
- 57 percent Changes in brand awareness
- 55 percent Total sales revenue generated by marketing activities
- 55 percent Changes in purchase intention
- 51 percent Changes in attitudes toward the brand
- 49 percent Changes in market share
- 40 percent Number of leads generated
- 34 percent Ratio of advertising costs to sales revenue
- 34 percent Cost per lead generated
- 30 percent Reach and frequency achieved
- 25 percent Gross rating points delivered
- 23 percent Cost per sale generated
- 21 percent Post-buy analysis comparing media plan to actual media delivery
- 19 percent Changes in the financial value of brand equity
- 17 percent Increase in customer lifetime value
- 6 percent Other/none of the above
While I couldn’t find an update of this study, clarity around the definition doesn’t seem to have improved in the last 10 years, given the results of The Fournaise Group survey. And the increased emphasis on digital and social media marketing in the last 10 years has probably made it worse. The Fournaise Group found that 69 percent of B-to-C CEOs believe B-to-C marketers now live too much in their creative and social media bubbles and focus too much on parameters such as “likes,” “tweets,” “feeds” or “followers.”
It’s time for marketers to stop using ROI as a buzzword for any marketing metric. You can’t measure and improve something if you don’t clearly define it.