I’ve got a confession to make: I hate ROI

Posted by Kip Edwardson on March 12th, 2010 at 6:41 pm

I've got a confession to make: I hate ROI.

There I said it. It is a financial calculation that is better left to finance managers and accountants, and not marketers. Most people who quote some type of ROI calculation don't really mean ROI in the true sense of ROI.

In its basic form, ROI is simply the return or gain, minus the costs or investment, divided by the costs/investment which results in a percentage. The "return" that marketers want to measure is…wait for it…. The Sale.

As a marketer, I hate ROI as a metric because it is simplistic, often unrealistic and sometimes even overstated. It implies a linear process and most purchase decisions are far from linear. It also implies that you can isolate with precision the impact that one event had on a sale.

Maybe before my time it was simpler, when there were less products on the shelf, 3 major TV networks, a handful of popular magazines, no satellite radio and no internet. Was it really that simple "back then?" I doubt it.

Yet, people will see a great case study on, say Google Adwords, or Facebook and they will ask, "What was the ROI?"

Without a complicated algorithm that factors in some type of weighting scheme for each influencer along the purchase decision making process path (which is hardly linear), how can anyone with good conscious suggest ROI? You can't.

The other problem with ROI is that, in theory, it has a beginning and an end. Take for example my purchase of an HDTV for my home. Do they calculate the ROI of my previous experience with their products? Or, is the ROI they want to know the influence that review sites had on my decision? Do they consider the fact that it took me over a year a make a decision?

This is where social media and ROI do not mix, and good luck convincing me otherwise. Don't get me wrong, social media for brands has plenty of upside (as well as pitfalls), such as improved customer service, market research, engagement, branding and CRM just to name a few.

Granted, I realize that the small taco stand on the corner is popular on Twitter and every time Mr. Taco Maker tweets a deal out to his followers they flock to his stand. But, if his product wasn’t any good, they would never be Twitter followers in the first place, or Facebook fans or…you get my point. Further, something (proximity, word of mouth, advertising) had to influence them to become customers in the first place, and it must be the product that keeps them coming back for more.

Here's a suggestion: take the amount you are investing in social media and add it to your overall marketing spend. Then, subtract the overall marketing spend from your sales, and divide that number by your marketing spend. But, you have to assume all other factors remained constant from the previous year to get a true analysis. I'll bet they haven't.

As marketers, we need to find something else. If anyone has suggestions, I'd like to hear it.

3 Responses to “I’ve got a confession to make: I hate ROI”

  1. Ben says:

    I agree with you but I also don't.

    If you're using advertising as a channel to create branding then its very difficult to calculate ROI just as you said. Its not a quantifiable percentage. It takes into account customer experiences with your product, outside reviews, recommendations from friends and family and much more. Using ROI in this case is not the right metric.

    If you're creating ad campaigns designed to generate a sale then ROI is a very important metric on your ad spend. When you're trying to capture a sale with direct marketing you can change your ad copy and landing page to affect your conversion rate which in turn drives your ROI. With this type of marketing optimizing your ad and sales copy can have a dramatic effect on ROI. In this type of marketing its not about what influences a customer to get to a sale but that you are advertising on the end of his/her chain of the buying cycle. so ROI does matter.

    There are many ways to market. If you don't manage your ROI on your direct marketing you're leaving money on the table. Its a difficult balance because you want to maintain your brand while driving sales and profit. The ultimate goal for a marketing department in a company is to manage the brand and move products in the market.

    So there's an agreement and a disagreement.

  2. Kip says:

    Ben, I'm sure you work in direct mail and I have done my share of it in the past so I know what your saying. But I was relating ROI to social media. But you went from "ad spend" to "direct marketing" in the same thought. An ad spend, could mean a dozen things or more and you have to avoid the slippery slope of giving credit to the last impression. Thus, another big issue I have with ROI.

    Now, cost per lead, or lead acqusition ect. is another measure that direct marketing should consider.

  3. This made me smile right from the title - I come from the non-marketing perspective but I am also sick of hearing ROI overused. So while I sit here typing and trying to determine the ROI of my time commenting and attempting to see if someone has moved my cheese (dated but best I could come up with on the fly!) I have since lost my vision for the comment. Cheers!