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]