A widely held view in the C-suite is that sales generates cash while marketing eats it. The perception is understandable because marketing has failed to adequately measure and communicate its contribution.
It’s true that many marketers are accepting the challenge of measuring marketing’s return on investment (ROI). But marketing ROI, while useful to know and necessary to choose which programs and campaigns work best, isn’t going to win over the C-suite.
The reason is that the C-suite only cares about three things: profitability, growth, and shareholder value.
The C-suite doesn’t care about output- or activity-based metrics. These are the things that marketers count: leads, press mentions, site visitors, downloads, Twitter followers, Facebook likes. Activity-based metrics are prevalent in every field where outputs are intangible.
The C-suite also doesn’t care about operational metrics, which show what you spend on the activities you count. Operational metrics gauge efficiency. CPM (cost per thousand views) is an operational metric. Cost per lead is an operational metric. And ROI – the cash you generate divided by the amount you invest, usually annualized so it can be compared to other investments – is an operational metric.
The C-suite cares only about outcomes. Revenues are outcomes. Profits are outcomes. The activities that you do and the cash laid out to do them are not outcomes.
What’s Wrong with ROI?
Here’s why relying solely on ROI problematic:
ROI measures efficiency, not effectiveness. ROI measures efficiency. Efficiency is goodness, but not on its own. A local running store is offering a “Be a better Runner” program that promises to increase my running speed by 15%. But even if I get 15% faster, I won’t win if I stray off the course. Efficiency (“doing things right”) without effectiveness (“doing the right thing”) won’t get me to my goal.
ROI is a never-ending grind. CFOs love operational metrics because they’re all about doing more with less. Finance sets you up on the treadmill, gives it a spin, and you’re off and running. Hit your targets and your reward is likely to be a cut in your budget.
There are limits to the return you can achieve. Performance can’t improve forever. Your market is limited. The budgets of your customers are limited. Doubling your efforts won’t lead to a doubling of results. Economists call it the law of diminishing returns. Despite the close tie between finance and economics, many CFOs didn’t get the memo.
ROI is simplistic. It’s a multichannel, multi-touch world, yet ROI calculations assume that we can isolate the impact of a single campaign, channel, or piece of content. Scientists have lots of terms to get at the idea that causation is often a mystery: causal density, the problem of induction, the law of small numbers, the illusion of explanatory depth. We try lots of things. We observe results. The link is often unclear.
ROI calculations are easily manipulated. There are lots of ways to calculate ROI. For the numerator, how much of the revenue is attributed to marketing? If marketing provides the lead and sales closes the deal, how is the revenue divided up? For the denominator, what counts as a cost? Do you include an estimate for marketing labor or just the out of pocket costs?
ROI rarely accounts for the time lag. Marketing investments made today may not yield results until 6 to 18 months in the future. This is especially true for complex technology solutions. Over what time period is ROI calculated? Is it recalculated when a new lead comes in or a deal closes?
Most marketers don’t know what ROI is. ROI is one of the most misused concepts in marketing. ROI is quite literally a financial calculation. However, how many marketers are doing financial calculations when they report ROI? Not many. If you want to see an example of what I mean, click here. Are these ROI statistics? Please let me know if you think they are.
How to Use ROI to Your Advantage
I am not saying that there is no role for ROI in marketing—there is. ROI metrics are best used for comparisons among different marketing investments and marketing mix/budget optimization. For example, to direct investments from less productive activities to those that are more productive. ROI is also helpful when comparing marketing activities year over year. Insights from ROI calculations can keep you from doing things because always have done them.
What do you think? How do you use ROI in marketing?
Special thanks to Laura Patterson, President of VisionEdge Marketing, my research partner and inspiration for this post.