Marketing ROI: Return on [Your Concept Here]

by Chris Kenton on December 14, 2006

I got a trackback this afternoon from Brian Solis, and his post on ROI vs. ROP for social media metrics. ROP? Yet another formulation of RO[blank] intended to sound like a financial metric. Brian’s passion about the need to engage customers and the value of social media is spot on. But I have to groan when I see another new permutation of Return On Anything Short of Actual Revenue.

As I argued passionately during the last frothy marketing trend on "brand", marketers are great at creating, evolving and innovating ideas. But they are also trend-crazy. And when you combine those two predilections with serious business issues, you end up with a profession that continually confuses the hell out of the rest of the business group. Every marketer you talk to defines things a different way. But more important, especially on the topic of ROI, marketing loses all credibility with the board room suite when it twists and bends financial metrics designed to measure value creation into concepts that skirt the issue of accountability for actually creating value. This goes for Pepper’s and Roger’s Return on Customer as well–even though there are many good ideas there about how to value customers. 

ROI means something important that too many marketers seem completely unable to get their arms around. It means demonstrating in clear terms that the programs you’re pumping money into are returning real cash value to the company. Is that hard in marketing? Absolutely. Often it’s next to impossible, or at least the cost of measurement is greater than the cost of the program in the first place. But marketers need to be straight up with those challenges, and not dismiss or dilute the value of ROI by introducing ROFOTM (Return On Flavor of the Month).

Businesses are right to ask about the ROI of social media. If I put a dollar in the stockmarket, I get a ton of data that helps me peg the risk of getting my dollar back with interest. Sooner or later, marketers are going to have to learn how to explain why a shareholder’s dollar is better invested in the company’s marketing programs and not the stockmarket. Marketing will not win any points by responding with a feint and a dodge, and saying "these other metrics are more important", or my personal favorite, "they don’t get it."

Social media is early in it’s evolution, even if it is building on older concepts (remember The Well?). The value creating potential varies tremendously from industry to industry, and from company to company, and it also comes with some significant risks for companies used to commanding and controlling their messages and markets. Those challenges should not be swept under the rug, with social media packaged up, wrapped in a bow, and sold as the new Web 2.0 elixer of life. Those challenges–like how best to measure the potential ROI of social media–should be mapped, debated and addressed openly.

There are a lot of good arguments to proselytize social media today. It’s relatively cheap, it can generate market insights often more expensive to gain in other ways, it can improve customer intimacy, it can dramatically improve visibility on the Web–there’s a lot more, but good measurement is not on the list, yet. Let’s please spend a little time and energy figuring that one out before we package it up and sell the hell out of it.

{ 4 comments… read them below or add one }

Brian Solis December 15, 2006 at 9:29 am

Great piece Christopher. The idea here isn’t to introduce anything new…it’s a play on ROFOTM trying to measure anything ethereal in nature such as PR or social media. It’s a spark to get marketers to force ideas to tie anything marketing-related to the bottomline of business. Your point, “But I have to groan when I see another new permutation of Return On Anything Short of Actual Revenue” is right on the money…however, I’m not proposing this at all. It’s just a way of trying to get people to think about other forms of metrics in order for us as marketers to sell our services and strategies and then link them to tangible business benefits. We can’t RO[anything] for PR or social media in a language that execs can comprehend right now, so we need to fix that. It’s the “necessary evil” vs. “they don’t get it” and we can’t accomplish anything from this “tug-of-war” platform.

Trust me, ROP, ROC, ROI, ROFOTM, is less about tapping into trends, and more about getting marketers to think about ways to help each other bridge the gap between marketing speak and the real world needs of CxO’s.

Chris Kenton December 15, 2006 at 1:02 pm

You’re a good sport, Brian. And you nailed it on the head about “getting marketers to think about ways to help each other bridge the gap between marketing speak and the real world needs of CxO’s”. I just wish I saw more marketers truly trying to understand what Cx0′s need, rather than trying to convince them that they need something else. Marketing’s credibility has taken a big hit over the past few years, and credibility is a commodity we can’t afford to lose anymore. Thanks for the follow up.

Don Peppers December 16, 2006 at 7:16 am

Chris, you are right on, mostly. Martha and I also have to groan whenever anyone comes to us with yet another “return on…” idea, and it seems to happen all the time. Return on employee, return on loyalty, return on networking, return on ad nauseum.

However, the Return on Customer (sm) concept is not just a clever way to say “marketing.” It is a genuinely different financial metric, based on a common-sense principle that is often overlooked by marketers: Customers are limited in number, and they should be treated as a scarce productive resource.

Capital is a scarce productive resource, also, but its scarcity is not absolute. Capital has a cost, and provided you can meet that cost, then capital is more or less unlimited. If you have a marketing initiative that promises a good ROI, you can always go to the bank, borrow the money, then repay it with interest after earning your ROI.

But no bank will lend you customers to be paid back with interest. You can only create value using the customers and prospective customers available to you. Case closed. Game over.

Let’s say you were trying to evaluate which of two possible marketing initiatives to undertake. Initiative A requires you to spend $10 per customer and yields a profit of $5 per customer, for a 50% ROI, while Initiative B requires you to invest $20 per customer and yields $7 in profit, for a 35% ROI.

Any sane person would choose the 50% ROI, right? Wrong. Since both the 35% and the 50% ROI are clearly in excess of your cost of capital, your supply of funds is unlimited, but your supply of customers is not. Suppose you had just that ONE customer? Then Initiative B would create $7 in profit, compared to just $5 for A.

But here’s the punchline: You should still choose Initiative B even if you “only” have a million customers, or 100 million.

We’re not saying that ROI isn’t important. Money does cost money, and you have to pay attention to the return you get on the money you use. But ROI is not sufficient, by itself.

So, while we couldn’t agree more that almost all of the RO[X] ideas out there are not very helpful, we beg to differ when it comes to ROC, which will actually lead to different decisions.

Chris Kenton December 18, 2006 at 7:09 am

Don–

Welcome to Marketonomy. I certainly appreciate your time coming out to explain ROC. I have nothing but respect for your marketing expertise, but I have to say I’m not sure I see the suggested parity in value between a metric like ROI and your proposed ROC. Don’t get me wrong–I agree wholeheartedly with many of your statements about the value of customers, the importance of taking a long-term view, and the need for companies to know the value different customers create, but when it comes to delivering up hard numbers on underlying calculations like “Customer Equity”, I start to wonder how well the utility of the concept lives up to the promotion.

Maybe this could be an opportunity for me learn. If you’re at all interested, I’d love to invite you to discuss ROC on Marketonomy in just a little more depth, maybe after the new year?

Thanks. /chris

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