When you bring up “ROI,” or return on investment, with a data or a finance person, they take the term to mean something very specific. ROI has a very clear cut and concrete definition. Entrepreneur.com defines ROI as “a profitability measure that evaluates the performance of a business by dividing net profit by net worth.” It is a measurement of purely monetary returns and encompasses the performance of the whole business.
Marketing ROI on the other hand (and its various definitions and methods of measurement) is a source of enduring consternation for marketers, analysts, and accountants alike. In marketing conversations the meaning of “ROI” gets stretched and reshaped to encompass a range of performance metrics, including return on ad spend (ROAS), the rate of increased share of voice or market share, customer conversion rates, and more.
In 2015 some of the brightest minds in marketing academia banded together to solve the issue of defining MROI once and for all. The result was a 16-page paper published in an academic journal. Even so, what they recommended wasn’t a one-size-fits-all metric, but rather that each marketing team develop a clear definition of the “specific decision-making context” of their marketing measurements in order to communicate MROI as specifically as possible. Here’s the example of an MROI statement they provided:
“Our analysis measured a (total, incremental or marginal) MROI of (scope of spending) using (valuation method) over (time period).”
At risk of adding to the confusion, here’s our two cents. Part of the reason that MROI is causing so much teeth-gnashing is because it’s given way too much weight.
We understand that demonstrating ROI is important to marketers. After all that’s one of the things Velocidi can help marketers with. We’re just saying it shouldn’t hold such a tyrannical position in the roster of marketing performance metrics.
In general, marketing shouldn’t be judged solely on ROI because it’s not always applicable. The use of ROI as part of a portfolio of KPIs is important, but it shouldn’t be the be-all-end-all because there are different business objectives in brand strategy. CPG brands, for example, are more likely to build their marketing strategy around maintaining brand awareness than driving store or web traffic, so it doesn’t make sense to focus on ROI.
Instead marketers need to be able to measure and report marketing performance holistically, using metrics and KPIs that show relative market share, brand awareness, lifetime customer value, customer progression down the funnel, etc. Don’t just get hung up on short term financial measures. Instead learn to argue the business value of your marketing outside the realm of financial returns.
In the cases where it is appropriate to measure the ROI of a marketing activity, it’s important to put consistent data collection processes at the forefront and make sure that you are managing your business objectives. HBR reported not too long ago that CMOs are often being set up to fail due to unrealistic or unclear expectations placed on them by the CEO, and are sometimes not given the authority to influence how those expectations are met.
Make sure your CIO and CFO understand realistically the role marketing plays in the business, and how performance should be measured. Then standardize your metrics and KPIs to align with the business objectives that you can all agree on.
Image by Hans-Peter Gauster