Why it’s Stupid to Measure ROI

business success

 

Ok, it’s not ALWAYS stupid — but more often than not it’s stupid to measure ROI in marketing and social media. That’s not to say that you should ignore the numbers, but you have to measure the right things. By focusing all your attention on measuring ROI (return on investment) you ignore the impact of all the factors leading to a purchase so you don’t make the “right” decisions as you build your strategy moving forward.

stupid to measure ROI
Image courtesy of Ten Pound Hammer

Why it’s stupid to measure ROI

First, and foremost, ROI only addresses the profit motives of the business, usually by assessing sales volume. Technically, ROI refers to the costs associated with making a sale by subtracting it from the sales volume. In the graphic above, you see how ROI contributes to your success and growth by measuring various aspects of the business to improve decision-making.

And, making a profit is a great thing for a business. It supports the owners, employees, and society at large (through paying taxes) so ROI isn’t some meaningless measure. The important thing is to recognize these other outcomes often help the business succeed in the long run. A classic example of overemphasis on ROI occurs when managers forgo needed maintenance to prop up their ROI numbers. In the long run, when you ignore routine maintenance, you shorten the lifespan of your equipment, suffer more frequent outages, and may even see the quality of your products decline. I once worked as a consultant for a specialty metals company. They billed customers for work in progress to shore up monthly ROI then incurred additional overtime and shipping costs to ensure the goods were finished and delivered in a timely manner to get paid. The result was higher costs that reduced the next month’s ROI. This became a vicious cycle that reduced profits overall.

ROI is very short-term focused

So, the corollary to it being stupid to measure ROI because it’s profit-motivated is that it’s short-term focused, as we saw in the example I mentioned earlier. This is a very short-term focus as we ignore doing things that contribute to sales IN THE LONG RUN.  For example, customer service is sometimes seen as a cost center subject to efforts to control expenses because good customer service costs money and fixing problems that come to light during such efforts also contributes cost of the operation. Providing good customer service provides many long-term benefits to the company as it contributes to increased sales over the long run and, in fact, creates a competitive advantage because it’s so difficult for the competition to copy. We KNOW good customer service impacts sales because we know WE don’t go places where the customer service is BAD.

Assessing ROI ignores processes leading to increased ROI

In marketing, we talk about a hierarchy of effects from awareness to purchase (also called the conversion or sales funnel) — now, I personally think this model is a little simplistic (since this often isn’t a linear process, but involves cycling in and out of the process over time), but the basic concept is true and the image below shows a model of this hierarchy.

content marketing plan

Consumers buy products they know about and are interested in — and creating awareness and interest don’t figure into many ROI calculations where only sales matter. Marketing efforts through social media and other forms of promotion, invite people down the hierarchy toward purchase rather than directly generating purchases. A big part of this process contributing to a purchase is building strong brand perceptions. Another big part of the process is building trusting relationships and social media is an excellent vehicle for building relationships. Engagement with your social media posts also figures prominently in creating future purchases by amplifying your message to new users and contributing to SEO (search engine optimization), resulting in more traffic to your website.

Unless a firm recognizes the contributions of all its promotional efforts toward a sale, it is unlikely to make optimal decisions moving forward. For instance, if you find that very few of your social media posts result in a sale, you might make the decision to drop your social media efforts in order to focus on other campaigns resulting in sales. Yet, if you were to follow visits from social media to their logical conclusion, you’d find that social media does contribute to sales by bringing in new visits that, over time, result in sales despite the fact that the first visit didn’t end with a sale (check out the example below to follow a visit to its conclusion). That’s why website analytics tools such as GA 4 (Google Analytics) allow website owners to do multi-channel attribution modeling to apportion the value of a sale across all the channels that brought traffic to the website prior to a sale.

multi-channel attribution
Image courtesy of Adalyz

ROI measures commonly ignore secondary transmission

In social media, this is an especially important oversight from a single-minded focus on ROI. Because much of the value of social media relies on customer-to-customer interactions, every time a user engages with your social media posts (Likes, Shares, Comments), they reach their communities, some of whom are not already connected to your social media. Engaging in activities that motivate customers to share your message can be very valuable but is often ignored in assessing ROI.

By assessing engagement and creating campaigns designed to increase engagement with your posts, you start users on a process that might generate sales down the road.

It’s difficult to tease out the effects of any one activity

Assessments of ROI assume a cause-effect relationship between the actions taken by the company and revenue. In marketing, tracing these cause-effect relationships is difficult, unless you’re doing some type of direct or digital marketing where each campaign is coded and you can track the code through actions taken by the visitor.  Even using direct marketing, unless that’s the only promotion running, there’s no way to assess whether other campaigns contributed to a sale by creating awareness or contributing to another stage in the hierarchy.

Another reason it’s stupid to measure ROI is that it ignores the impact of emotion on purchase decisions. Consumers care more about brands today. They want to support brands that share their values not just produce good products, as you can see below.

corporate social responsibility
Image courtesy of Customer Insight Group

Trust is another important emotion that drives sales indirectly. By focusing on creating trusting relationships and building a socially responsible business model, you generate higher sales in the long run.

They’re talking even if you’re not listening

For instance, firms use the perceived ineffectiveness of social media to produce ROI as an excuse to eliminate this strategy or to reduce the resources devoted to it. The problem is that people are still talking about you on social media even if you’re not listening and what they share might damage your reputation. It is only prudent to listen to what users say on social media so you can counter negative comments with facts and positive comments. Negative word of mouth travels farther and faster than positive, so you need to be quick to counter negative word of mouth.

Overemphasis on ROI stifles innovation

New products are inherently risky and the more innovative the product the riskier it is. Ignoring innovation, however, is a sure way to fail — at least in the long run. No firm can survive forever without new products that meet evolving customer needs better or respond to innovations introduced by your competitors. Yet, innovation is among the most costly activities for many firms and they avoid the hit to their ROI like the plague.

Take a look at entire industries that failed for lack of innovation. For instance, when the Japanese introduced electric furnaces to replace old, inefficient open-hearth blast furnaces in the manufacture of steel, US companies resisted because of the cost (plus resistance from the unions). Now, you can drive through towns in Pennsylvania and Ohio where the entire center is boarded up because the factory closed due to its inability to compete. If you don’t create new products that adapt to current needs yourself, your competitors will, and, soon, demand for your products will plummet.

Just because you think it’s stupid to measure ROI doesn’t mean you should stop measuring

Hopefully, I convinced you that it’s stupid to measure ROI. That doesn’t mean you shouldn’t measure anything. It means you need to adjust your metrics to encompass more than just sales so you include the factors contributing to those sales. You just have to work harder to assess how you’re doing and go beyond looking at your accounting records. Here are some ways you can determine whether your marketing efforts are paying off:

  1. Assess process improvement –
    1. awareness
    2. brand perceptions
    3. interest
    4. loyalty
    5. trust
  2. Track sentiments
    1. positive mentions
    2. negative mentions
  3. Engagement
    1. how many people engage with you across social networks, ie ReTweets, comments, sharing posts, etc.
    2. influence of those engaged with you
    3. number of coupons redeemed
  4. Innovations
    1. number of new products
    2. investment in new product development
    3. time spent seeking innovative ideas

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