How to Measure Marketing ROI

No one wants to throw money down the drain, so measuring marketing ROI (return on investment) is an important way to ensure you get value for the money your business spends. This is the first in a series of posts on measuring ROI in marketing.

First, let’s understand what ROI is.  Wikipedia defines Marketing ROI (or ROMI – return on marketing investment) as:

the optimization of marketing spend for the short and long term in support of the brand strategy by building a market model using valid, objective marketing metrics. Improving ROMI leads to improved marketing effectiveness, increased revenue, profit and market share for the same amount of marketing spend.

The definition of Marketing ROI is important because, as we’ll see later, many measures of marketing effectiveness fail to link what’s being measured to improvement in financial measures such as profit and market share.  In fact, social media experts define ROI as encouraging members of a social network to take “action” while in traditional media, measures of “awareness” and “attitude toward the brand” dominate.  Arguably these intermediate measures are antecedents of profit or market share, but there is leakage between them, as you can see below:

Problems assessing intermediate ROI measures

1. Leakage may be a small matter of a large percentage of the people drawn toward action or having a positive attitude might actually make a purchase.  More likely, leakage is severe and a very large percentage of these people FAIL to purchase the product.
2. Alternatively, many of those drawn to action or with positive attitudes might have made a purchase WITHOUT the expense of advertising.
3. Nearly ALL of the measures proposed to assess marketing ROI fail to assess the impact of consumers’ attitudes on other consumers (or do it rather poorly — for instance measures of influence in social media only assess the POTENTIAL of consumers to impact other consumers).
4. Overwhelmingly, measures of marketing ROI are short term oriented and fail to consider important long-term effects of marketing activities, such as a brand’s image. Using ROI measures such as attitudes and actions (measures that are easily measured in the short term) may lead companies to favor strategies that defeat the long term interests of the firm, such as improving brand image, which can only be measured over time.
5. Avoiding marketing strategies with fuzzy or unmeasurable ROI might not be appropriate for long term success.  For instance, using ROI measures to determine whether innovative ideas should obtain funding or whether existing brands should get the funds may lead firms to favor existing brands.  In part, this decision might be based on established ROI for the existing brand and unknown estimates of sales from innovative products or estimates that lack concreteness.  Here are some examples of this principle in action:
   1. Firms prefer to invest in traditional media despite declining ROI from these efforts rather than invest in social media using the argument that ROI in social media is unclear or poorly measured.
   2. As demonstrated in the Toyota recall, firms prefer to dodge problems rather than fix them.  Toyota likely assessed the likelihood that crashes and deaths would be traced to their vehicles as relatively small compared with the cost of a recall and repair of damaged vehicles.  ROI assessment was the likely culprit behind this decision as the repair costs could be measured with a great deal of accuracy (and were high), while the firm could not measure the cost of wrongful death lawsuits or the damage done to the brand image through ignoring the problem.
   3. Return policies often favor loss prevention, which can be measured fairly accurately, versus consumer confidence, which can not.  Firms charging restocking fees or making it onerous for consumers to return products embody this philosophy.

The RIGHT metrics

To improve performance, you need to have the RIGHT metrics.  What constitutes the RIGHT metrics varies depending on the type of business you have, your target market, and factors impacting that market.  Jack Welsh says this about metrics:

You might, for instance, have a strategy around innovation aimed at producing the leading products in every cycle, or you might have a strategy to become the low-cost global supplier, or you could have a strategy to globalize a company, taking its strengths in one market and translating them to every market.

Some metrics, such as Net Income are universal — applying equally well to all businesses.  Other metrics, such as time to market (used to assess how long it takes a firm to bring a new product or product improvement to the marketplace).

Regardless, applying these metrics blindly might not be the right marketing strategy.  By concentrating on net income, you might not invest in innovation that costs money now and may not provide returns until sometime in the future.  You also might postpone equipment maintenance, leading to greater costs as poor maintenance leads to increased frequency of equipment replacement.

Having the right metrics can be very useful in planning your marketing strategy and tracking your performance; having the wrong metrics leads you to focus on improving the wrong things which don’t help your marketing strategy and may even lead to poorer performance.

For instance, Jack Welsh, former Chairman of GE, recently stated that an overemphasis on metrics assessing short term shareholder wealth was

On the face of it, shareholder value is the dumbest idea in the world

Nascent social media is facing its own analytic problems.  Specifically, concentrating on gaining large numbers of followers on Twitter or Facebook friends may have no impact on your performance.  For instance, your social network may not contain those in your target market — consumers who have a need for your product, and the money and authority to buy it.

By focusing on improving these marketing metrics, you are expending scarce resources on the wrong things.  This leaves fewer resources to concentrate on elements of your marketing strategy that DO have the potential to improve your performance.

Solutions to your marketing strategy problems

• Don’t think just because other businesses are measuring something, you have to
• Understand your target market and what motivates them to purchase your product
• Data has a cost, so measure those things that have the greatest potential to impact your performance

The Right People

In order to be effective, metrics have to reach the people who have the authority and expertise to plan or make changes to the firm’s marketing strategy.  Unfortunately, research suggests that analytics may not be reaching decision-makers.

A related problem is that decision-makers may not understand the metrics they get. Or, they don’t know what decisions will impact these metrics.  Similarly, decision-makers may be inundated with data and might miss critical information hidden by too much unnecessary information.

Solutions

• Identify influencers and make sure they get reports detailing the performance of your marketing strategy
• Graphical or visualization software can significantly improve how well managers understand reports and reduce the cognitive load associated with handling large amounts of data.  Here is a good overview of available visualization software.
• Training will help decision-makers understand how to interpret analytic reports.

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Hausman and Associates, the publisher of Hausman Marketing Letter, is a full-service marketing agency operating at the intersection of marketing and digital media.