The Return on Investment (ROI) Craze Won’t Last
For over three years, I have sat back and witnessed the resurgence of a concept that seemed to be largely ignored or only found in dusty marketing books: Return on Investment.
I am referring to the buzz (or is hype a better word?) around social media ROI. What I find interesting is that marketing management is requiring social media ROI to qualify its worth before implementing it. Smart marketers know that it is impossible to determine ROI (a financial calculation) without having net profit, sales and investment numbers, which are not available without actually having done something. Could it be that demanding social media ROI is a stall tactic?
The next logical question then is if there is such a keen interest in social media ROI, why isn’t management requiring the same for all marketing, communications and branding? We should have those numbers readily available, right? (By the way, cost per lead is not the same as ROI.)
Why Isn’t ROI the Norm?
Two simple answers: Human nature and technology.
ROI requires due diligence, experience, performance, financial understanding and leadership. When we think about ROI, there are often positives and negatives on both sides of the equation (literally). ROI puts a spotlight on the good and bad; successful and unsuccessful, positive and negative. You cannot measure one and not the other, as my friend Steve Lubetkin and I discussed recently over lunch.
It is only natural that we would want praise for the positive and spare criticism for the negative. It takes a strong and confident leader to make planning for ROI as natural as breathing and—more importantly—to be able to embrace setbacks and risk.
When it comes to technology, the issue is closing the loop between marketing, sales and profit. Most companies utilize CRM systems for sales relationships, not marketing relationships and typically not profit calculations. When marketing relationship data is captured, it is often very siloed. CRM systems like SalesForce.com allow for campaign management tied to sales, but then there is the challenge of knowing exactly which marketing effort triggered a purchase; what efforts lead to that purchase and how all campaign tactics should all be weighted.
The good news is that for most digital marketing (especially in B2C), it is easy to determine a direct cause and effect—if it’s a simple campaign with a “buy” call to action. Then ROI can be determine as long as the investment has been accounted for correctly (staff time counts as cost!) and profit is understood.
The next level of complexity brings us back to human nature and political silos. Who owns the CRM system (or any technology) and the data? The company, right? If only it were that easy. I can think of at least four departments that struggle over the ownership rights for both (IT, Customer Service, Marketing and Communications).
The Future of ROI
David Meerman Scott believes that ROI measurement leads to failure and that leads and press clips are the wrong measurement, at least for online marketing. How then is a marketer to balance the ROI of online and offline marketing, which is often the case with integrated marketing? Is it possible?
If I had to make a prediction, it would be that ROI will be no further along in the next 5 years. As I said, it takes strong leadership to embrace ROI for every marketing and communications dollar spent.
I am a big fan of ROI and marketers on top of their game typically are too. However, organizations have a long way to go culturally and technologically and that impacts marketers.
What do you think? Is ROI a craze that will eventually fade away or will it become the norm? What has been your experience? What have you done to encourage (or not) ROI? What other issues are there around ROI?
Addendum (added 2/23):
I should have included the financial formula for ROI, it would make for an even better conversation and/or debate.
ROI = Net Profit/Sales x Sales/Investment
If you can’t provide all of these numbers, then you can’t provide an ROI. It’s that simple.
When it comes to social media, Return on Engagement or Return on Influence are not ROI calculations. If you want to valuate something, it’s brand equity.
A friend suggested that I plant a stake in the ground on this one. So, I will do just that. I believe the ROI craze won’t last because most organizations, agencies and marketers won’t have all three necessary & accurate points of data (Net Profit, Sales and Investment) required to calculate ROI. Some due to human nature, but a lot due to lack of proper technology (CRM, etc.). This will all lead to frustration and the net result will be not providing ROI.
If you work for an agency or consultancy, your challenge will be even greater because of your limited access to sales figures and net profit. Without those numbers you cannot prove the ROI of hiring your firm.
Like I said, I am a firm believer in providing ROI. That’s why I always make friends with sales, IT and finance.
Addendum (Added 2/25):
Based on Ben Kunz’s post, I wanted to add even further clarification to the ROI formula, because there seems to be some confusion (i.e. sales canceling each other out in the equation).
It is important to understand that the “sales” portions of the equation do not cancel each other out. It is required to have two separate calculations that are multiplied for a final percentage. Why? Because the first calculation is to determine the rate of profit on sales and the second calculation is to determine the rate of capital turnover.
The rate of profit on sales is influenced by things such as sales volume, price, product, marcom efforts, etc. Capital turnover only takes into consideration sales volume and assets managed. (This is basic accounting… for a CFO.)
So…further to my argument. 
[Image Source: Internet.com]
Even More Goodness! Related Posts:
Tags: 22 Responses to “The Return on Investment (ROI) Craze Won’t Last”
The Harte of Marketing by Beth Harte is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.
Based on a work at www.theharteofmarketing.com. [If you have a question about what you can use from this blog, click on the above Creative Commons link to learn more.]
Hype is DEFINITELY the right word and it’s without a doubt a stall tactic. I’ve written several blog posts about this exact same topic and it all boils down to HOW you’re using social media as to if it will have a true ROI or not.
If you’re using it for awareness and community building (it’s bread and butter) then ROI is the wrong metric to look at because you’re work isn’t directly tied to dollars and thus leaves out one of the variables in the ROI equation. If you’re using it for lead gen then ROI should be just one of the many metrics used during those activities, but it still shouldn’t be the focus because you may not see a positive ROI in the immediate future.
Another problem with “Social media ROI” is what happens when it just becomes part of how you do business? Companies no longer ask what the ROI of their telephones, fax machines, or personal computers. They’re just part of how the company does business and seen as necessary items. This is how I see social media going in the next few years.
We already know that it’s much cheaper to keep customers we already have than it is to acquire new ones (real network marketing, not the mlm crap). As social media becomes part of the process to do that and businesses become more social in general the cost will be absorbed and we’ll be on to asking what the ROI is of the next set of tools and methods that come onto the scene until they become accepted in the same way.
Josh Peters recently posted..4 concepts to optimize and simplify your online presence
[...] This post was mentioned on Twitter by Beth Harte and HFevolution™, Mark Ozimek. Mark Ozimek said: RT @BethHarte: The Return on Investment (ROI) Craze Won’t Last http://bit.ly/frIyo8 (What do you think? Will the ROI hype fade? Would lo … [...]
Beth…you always have smart things to say and you have me thinking today.
Honestly…ROI is never going to be a dead issue, especially when it comes to marketing/pr dollars. Regardless of the organization, someone always wants to measure something, and it comes to dollars spent.
Bottom-line, where are the organizations spending dollars when it comes to Social Media. Now I know that it is somewhat of a rhetorical question, but organizations are spending money on human capital and technology. So I guess that we as communicators (that are using Social Media as a part of a strategy) might be more focused on ROI than we think. Why, to justify our existence within this strategy.
My only concern with Social Media ROI is that it is turning the focus away from “Social” & “Community” to just another measurable statistic like most other push, media “campaigns”. It is turning Social Media into more of a campaign and away from community.
Just my little humble opinion for the day, thanks for making me think a bit!
BR
Bobby recently posted..Where do those good ideas come from Stories
I love this post because my biggest beef with the whole ROI of social media question is that why is it never demanded of anything else? Like you say–why isn’t anyone asking about the ROI of marketing and everything else? I never thought about the stall tactic aspect–I think you’re totally right.
Maggie McGary recently posted..Huffington Post Bloggers Arent the Only Ones Getting Punked
Beth: as long as social media costs money, there will be a need to justify adding headcount or infrastructure to do it. Within the social media bubble, this demand for ROI seems absurd. But in the C suite, where this investment is played off against adding another salesperson in LA or another acoustical engineer, defending what you get is imperative.
Eric Schmidt described marketing as “the last bastion of unaccountable spending in corporate America,” – a sentiment I don’t share because I’d challenge any other department to live under the same scrutiny – but unfortunately, that’s often what the C suite thinks. Social media is a cost center in most cases and it needs to prove its worth versus alternatives.
My advice? Embrace the ROI. Show the break even. Because it’s going to come up.
Of all the social media memes, this one is built to last. It actually preceded social media through generation after generation of marketing, and is the issue clients always care about. Marketers have to deliver ROI, end of story.
Geoff Livingston recently posted..The Good- the Bad and the Ugly of Online Cause Marketing
I agree with Geoff, you’ve always got to deliver on ROI, period. The average tenure of a CMO is something like 28 months. They are under enormous pressure to deliver. The savvy CMO’s and the marketers they work with know how to build a case for achievable ROI (which is what I got from Beth’s post)
If you let the CMO, Marketing Directore, etc. believe the return is going to be new sales or customers when in reality the campaign you build is to build loyalty then it’s your own fault when it blows up in your face. And they are going to be held accountable for making the decision, so you better believe you are accountable as well.
My favorite ROI case to date has been the Blackberry “May the 4th be with you” tweet (a reference to National Star Wars Day). The VP of Global-Digital was forced to explain himself for using the social media arena for something so banal and unrelated to Blackberry.
His response: “I remember getting emails from my peers asking me why we would post such a thing and was this why we created our Twitter channel,” he wrote in an email interview. “My response was that this post reached over 150,000 people, 98% of the posts were positive, most tweets made a positive association with our brand, and it drove a 15% increase in our followers. Now what’s the value of all that to our company? For the cost of $0.00 we have increased positive brand sentiment, generated a measurable earned-media value and now have 20,000+ more people who I can share product-related information to. Not a bad ROI.”
Jason Hill recently posted..To ADDY or not to ADDY- Relevance & The Business Case
Beth I think you are on the right path here. The effectiveness of social media, and the tools themselves, are still greatly misunderstood by the c-suite, so they are wanting ‘guarantees’ of success before any efforts are launched. I think as companies do more social media marketing and become more comfortable with the process, that this talk will die down.
Companies will (and should!) ask that any marcom initiatives they launch be held accountable, that’s just good business. 10 years ago companies were wanting ‘guarantees’ around SEO efforts, now most companies understand the value of search traffic. In fact, pointing out the SEO benefits of social media is often a way to help convince skeptical companies to sign off on that SM strategy.
Mack Collier recently posted..Social Media Crisis Management- A No-Nonsense Guide
Couple of key data points to consider for those who believe ROI = Craze:
1) CFOs Gain More Control: According to a new Accenture study of 1,054 senior finance executives, in the wake of the recession, more chief financial officers (CFOs) are expanding their role beyond finance. This includes more CFO involvement in key decision making, including helping to set business strategy, deciding where to invest capital and even looking at product mix and go-to-market strategies.
Over the past 18 months, the survey results indicate that CFOs have assumed significant additional responsibilities for several key groups, including: information technology (43%), human resources (39%), production (38%), customer service (37%), and even marketing / sales (33%).
You think financial diligence will diminish with more CFO control over decision making process?
2) IT is now a Cost Center / Marketing is Next?: Investments in IT were often seen as beyond ROI – where the true value of the investments could not be measured. Post the bursting of the tech bubble, CIOs were under extreme pressure to prove the value of IT – a hangover from an extreme spending binge. However, many failed to justify the spending requests and prove that there was a real bottom-line value in IT. Post recovery, starting in 2003, IT as a percentage of revenue declined each year .. even as companies expanded other groups and investments…. and this trend continues. IT is now seen as a cost center in most organizations, and do-more-with-less is the rule.
Don’t think the same thing will happen to marketing, especially with 3-4x the spending vs. IT in most organizations … less likely for sure, but not outside the realm of possibility.
Thomas Pisello recently posted..Updated Alinean Social Media ROI Calculator – New Graphics and Refined Research
I agree with Geoff that “Marketers have to deliver ROI, end of story.”
At the end of the day, bottom lines matter. Unfortunately, the scrutiny that marketers deal with as Stephen Denny said above is not equal throughout all departments.
As marketers, we’re only as effective as our sales teams are at closing the deals, as our production/service departments are at delivering product/services accurately and on-time, and on and on. The ripple effect has to be recognized throughout an organization when determining the effectiveness of marketing, whether it’s utilizing the medium of social media or any other. It’s easy to write-off and end a campaign that wasn’t successful at producing great results. However, companies need to dig deeper and make it a point to leave no stone unturned when measuring results, ensuring a clear understanding as to why ROI wasn’t earned on a campaign, results weren’t achieved as expected, and where the inefficiencies are in the process.
Kelly Kirk recently posted..KellyKMarketing- RT @randfish- Truly unique approach to search- http-seomzme-hxBphL analyzing importance w- language references influence instead o
Josh, if social media’s ‘bread & butter’ is awareness and community then that’s branding. The focus should then on what is the equity of a brand and if the brand starts or stops being social how will it’s brand equity increase or decrease. It’s not ROI, but it is still something that can and should be measured to justify social media.
I would disagree that social media is like the phone, computer or other devices. As a channel used for marketing, it’s akin to direct mail, e-mail, events, etc. There is an expense attached and ROI must be determined. My fear is if we say that social media is like the phone, then a lot of resources will go unaccounted for, which will lead to a perception that social media isn’t valuable.
In following your logic you are helping to make my point that the ROI trend won’t last. Because once upon a time a website was a tool and email was a tool and direct mail was a tool…etc., etc. People have moved on and ROI justification is no longer needed as these tools have become the norm. Are we on the same page?
Bobby, I am always happy to get the ‘ol brain juices flowing! I think PR professionals (who don’t focus solely on publicity) would firmly agree with you. Most PR pros are not required to provide an ROI for the budget they receive each year. Personally, I think they should ROI and brand equity, but that’s a discussion for another day. I have debated in the past that marketers are always the first to be laid off because they don’t “prove their worth” (i.e. ROI). There are many reasons for why this happens. For example, if their boss doesn’t plan for ROI what happens then? I m not convinced that all marketers are out there planning and proving ROI, but I am more than happy to be proven wrong.
Maggie, I think if measurement were instituted across all channels, we would see a whole lot of budget cutting.
Years ago (1997-2000) we used a “Media Effectiveness Report” to track our investments and if a publication, list, tactic or channel wasn’t pulling its weight it was cut. It helped us to see where to spend our budget wisely, that’s for sure!
Stephen, I couldn’t agree more. The only other department that I know of on the hook for proving the ROI of expenditures is IT internally. Since I come from the high-tech industry, I also see it in data center management. For every piece of hardware purchased space, cooling, and power need to be justified (the last two are costs that often get passed on to customers). I think Frank Eliason (ex-Comcast) once wrote about ROI for the customer service area…in that case it would be cost savings versus sales.
Geoff, I agree with you 100%. But like I said on Twitter, I’d like to see proof that marketers and agencies are providing ROI (not you specifically, in general). I don’t see it happening and I don’t think the demand for it will last. Again, I am more than happy to be proven wrong by some savvy marketers.
Jason, here I thought their tenure was 18 months. I think with ROI proof it could be bumped up to 28.
Unfortunately, Blackberry’s VP of Global Digital was missing a couple of very important parts of the equation: Sales and Net Profit. Unfortunately, he wasn’t proving ROI with his tweet.
Mack, I’d throw SEO into the pot of what needs more ROI scrutiny. Often there is a direct correlation between PPC and sales. From there net profit only needs to be determined. If anything digital marketing is closer to ROI proof than more traditional tactics.
Thomas, I think the CFO’s should be more involved (and other members of the C-Suite) with checks and balances when it comes to strategy and resources. Trust me, I believe in product/service innovation, but NOT when there isn’t a market willing to purchase. I have been in many a job where engineering and sales, not marketing, determined product development. It’s not a good thing, trust me. As for marketing budgets being cut, that happens every time there is a recession. The key is to use the money wisely to begin with and to scrutinize that 1% return that we see with traditional and digital media. There is a deeper issue and it’s the elephant in the room.
Kelly, I believe we might be marketing twins separated at birth. You just out a spotlight on the elephant in the room.
Processes and strategy are severely broken, but it seems no one wants to admit it.
[...] The Return on Investment (ROI) Craze Won’t Last For over three years, I have sat back and witnessed the resurgence of a concept that seemed to be largely ignored or only found in dusty marketing books: Return on Investment. I am referring to the buzz (or is hype a better word?) around social media ROI. What I find interesting is that marketing management is requiring social media ROI to qualify its worth before implementing it. Read the complete article: Theharteofmarketing.com [...]
[...] the original here: The Return on Investment (ROI) Craze Won't Last Tags: communications, customer, departments, for-both, future, least-four, marketing, [...]
Some of the sharpest nails in the coffin of ROI are data and time frames. As you suggested, it takes a very disciplined team to calculate all the data required to make any ROI number accurate and, thus, meaningful. Most creative types don’t have that diligence. (Let’s take those silos down and get some great number crunchers as integral parts of creative marketing teams.) When it comes to ROI, we also need to remember that time for all the facets of a campaign to work is critical and hard to estimate. We may want the sales impact to happen in 90 days, but it may actually take much longer. Kind of like giving your child Tylenol to bring down a fever…if you re-take his temperature 15 minutes later, you will likely see no difference. But wait, and hour and now you have results! There are so many variables, some uncontrollable, that impact when tactics will move the needle. So while I agree with you that ROI is “dead”, I think of that more in terms that few will put in the time or have the patience to get it right. But I don’t think that will keep people from using the term well into the future. Hasn’t stopped ‘em yet.
Thanks, Beth. We need some clarification on the role of ROI in social media and I am thankful for voices of reason out there like yours. When I do some digging, I’ve found that clients are more worried about tools than they are about the actual component of ROI–wanting to be sure there is something reliable to direct mid-course corrections when needed. I echo the sentiments here that when ROI is required up front, it is usually a sign of major foot-dragging about social media or competence of the marketer, not ROI.
Beth,
As many have said above, its all about capital budgeting. There are always more projects looking for funding than there are funds.
Not being able to demonstrate an ROI merely means that another project that can do so, will get the scarce resources. The only “next” option you have is to argue that it is “Strategic”, but that is a far less reliable argument as you then face every other hot “ism”
To think otherwise is frankly naive, and misunderstands how business works. You are best off thinking about how to estimate the bits of data you don’t know, for your ROI calculations
The only exception is where the entire business is built on Social Media, but there the ROI is the exit price and its a gamble, hence its the province of venture capital.
ROI is hard. I was (an remains) hard for networking and communications equipment, a field I worked in for a while, even watching colleagues try to build an ROI calculator at one point. The data points can be slippery, subjective even– but as Geoff rightly points out, you have to prove your worth.Direct revenue or savings? That would be nice- but somehow prove value. We can do that- just make the executives define value and frame it for them. Don’t give up just because i can feel abstract.
Doug Haslam recently posted..How to Fight Social Media Book Fatigue
Mary, adding number crunchers is going to be a “must” in the next few years. You raise another really important issue… time. It is often very difficult to loop back 2-3 months later (after teams have moved on to other projects!) to track the results, especially in B2B where a buy cycle could be as long as 9-18 months. To clarify, I don’t think ROI is dead but I do think the demand for ROI pre-launch will fade away.
Chris, as you know, the tools will always change. They should be more concerned about the concept and how their current marketing is returning an investment for them.
Alan, ROI is not solely for capital budgeting, to think it is would be naïve as well and an excuse for not providing ROI on marketing efforts. There are multitudes of CFOs calling for ROI of yearly budgets distributed. They want to know what the return on a $20 million marketing budget is. If the ROI isn’t justified, budgets get cut. Not to mention that VCs and shareholders want to know the same, which requires different numbers than that provided to the CFO (i.e. you need to determine ROI on the investment dollars only). That’s exactly why the equation factors in the rate of profit on sales, which is influenced by things such as sales volume, price, product, marcom efforts, etc. As I said in addendum #2, this is accounting 101.
Doug, I feel your pain. I was also responsible for ROI (and TCO – Total Cost of Ownership) tools when I was in the high-tech industry. I know it can be done (perfectly, no, of course not) and that’s why I am a proponent. I am NOT saying not to provide ROI. I am saying most people will tire of demanding it or trying to provide it because it is difficult. Again, more than happy to be proven wrong.
[...] all the social media memes, the ROI conversation is built to last. It actually preceded social media through generation after generation of marketing, and is the [...]
Nice post, Beth. ROI abhors speculation. Just talk to farmers who provide us with something as basic as food. Stuff happens. If people who sow and reap could crack ROI and projection, they’d have done so by now. Until then we just buy what there is by the pound, prices adjusted for crop shortages, difficulties and so on. That pound is the metaphor for PR. The customer doesn’t want to pay for PR wheel spinning and fails any more than the consumer wants to pick up the tab for bugs and droughts. What are PR people putting on the scale?
Kate, a very interesting analogy there! Personally, I think there are some aspects of PR that should deliver ROI…specifically publicity. Time will tell.
[...] a really good discussion on social media ROI, see this post on the {grow} blog, and this one on The Harte of Marketing. GA_googleAddAttr("AdOpt", "1"); GA_googleAddAttr("Origin", "other"); [...]