Tag Archives: ROI

Social Media Breakfast on ROI

The second San Francisco Social Media breakfast was a great success, despite the competition with Web 2.0 down the street not to mention spring vacation for many people. Jonathan Knowles flew in from Toronto to join us in a discussion on Social Media Metrics, and as always he did not disappoint. Jonathan’s rare ability to bridge the gap between marketing and finance provided a lot of wit and wisdom for marketers struggling to justify an investment in social media. There were so many worthwhile takeaways, from insights into the mindset of the CFO to suggestions on how to frame marketing metrics for social media.

We’ll have video of the breakfast from MinerPro available shortly, and you can get some snippets of the discussion from the Twitter feed. We’ll be kicking off our book discussion of Jonathan’s Vulcans, Earthlings and Marketing ROI next week.

In the meantime, I’ll set the tone for the discussion by calling out one of the key insights from Jonathan’s talk. Jonathan pointed out the fact that ROI as a specific metric is a short-term measurement of efficiency. In the CFO’s mind, any time you discuss ROI, the financial assumption is that the expense and the resulting revenue occur in the same quarter. So when marketers use the term ROI in the context of social media, they’re explicitly limiting the frame of discussion to short-term revenue generation, taking off the table any longer benefits to brand equity, improvements in customer satisfaction, and long-term reduced costs of marketing.

As Jonathan pointed out, there are three domains in which CFOs measure value: Revenue, Growth and Risk (reduction). While there are some avenues to short-term revenue from social media campaigns, primarily in retail, for the vast majority of social media efforts today the real value will be seen in longer-term Growth and Risk Reduction. When, to a CFO’s ears, marketers clumsily speak about “ROI” as a catch-all phrase for poorly defined “value”, they’re missing a critical opportunity to communicate the value of social media and to set expectations for measuring success. That simply isn’t a mistake most marketers can afford in this economic climate.

Join us for the online book discussion to dig in more deeply into this topic.

Jonathan Knowles addresses the Social Media Metrics challenge.

Jonathan Knowles addresses the Social Media Metrics challenge.

An ROI story: The metrics were thiiiiiiiis big

An ROI story: The metrics were thiiiiiiiis big

Photos: Thanks Bill Johnston!

Social Media and the Cult of Marketing ROI

Mr. Kool-AidOver the past few years, I’ve had a lot of opportunity to write about marketing finance and metrics. Like many marketers of my generation, my understanding of marketing performance metrics was transformed by the 2000 recession. At the time I was president of a marketing agency in San Francisco, and as the economy plunged, I watched as clients mercilously slashed marketing teams and budgets. When the economy bottomed out, Marketing ROI became an obligatory mantra recited in every new business meeting. Marketers got swept up in the cult of ROI, accepting an unassailable truth that dictated their behavior, without question or true belief. Few marketers had the training to put ROI in a real financial context–our business schools don’t like to worry creative minds with accounting requirements–so Marketing ROI was interpreted in myriad ways, which often meant little more than a vague definition of “success”.

With a vacuum of financial acumen among marketers and a rising imperative for accountability, CFOs gained ever greater dominion over marketing programs by holding tighter purse strings. Marketing gurus responded with all kinds of new marketing formulas featuring pseudo-financial concepts–Return on [Your Concept Here]–instead of promoting basic financial fundamentals so marketers could connect with the CFO on common ground. This only distanced marketers further from the boardroom, as I wrote a couple of years ago:

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.

Even before the new financial crisis hit, I could see the ROI shackles hobbling marketing organization’s and their ability to innovate. It wasn’t the concept of measuring peformance that was the problem, but the inability of marketers to effectively argue a compelling business case that challenged whatever rigid ROI framework they felt imposed on them by the CFO. As social media surged, I sat in many dozens of new business meetings where marketing executives stalled out in their enthusiasm for innovation when it came to justifying any new program without a proven ROI. The irony was stunning: on the one hand, businesses and board rooms were buzzing with the new wisdom of Innovation, and yet they couldn’t execute anything innovative because there was no appetite for risk–and this was when times were good:

I don’t want to be flippant about this, but I think marketers need to bring a little balance to the justifiable demand for performance accountability. We do need to be accountable, and we do need to show that we’ve thoroughly vetted the investments we’re making. But when you’re in a competitive market that demands innovation, you have to get in the trenches to help innovation along, instead of just throwing up knee-jerk stop signs to every project that doesn’t come with a business case tied up in a neat bow. It makes me think of a prehistoric fish in a receding inland sea saying to an amphibian “so, what’s the business case for legs?”

With the new economic crisis deepening, this is going to be a critical test for marketers. A steep recession drives a natural imperative for immediate returns. But we’re not just in a recession. We’re at the apex of a global cycle of creative destruction. GM, CitiGroup, New York Times–representative samples of the titan industries of manufacturing, finance and media–are all on the edge of bankruptcy. The businesses that survive this destruction–and the marketers that support them–have to find new ways to drive returns, and those new methods are not going to come gift wrapped in a mature ROI model. In fact, ROI may be entirely the wrong financial metric. But marketers with no grounding in finance, and with no common ground to share with the CFO, won’t be in a position to make those arguments, or to critically challenge the happy case studies offered by vendors.

Fortunately, there are some ports in this storm. There are a few marketing thought-leaders that can not only bridge the gap between CMOs and CFOs, but they have the talent to make marketing finance accessible to mere mortals. One of my favorite lights in this small pantheon is Jonathan Knowles, a banker by training and a brand consultant by trade. Jonathan has written extensively about marketing finance, including an entertaining book on Marketing ROI. I interviewed Jonathan for BusinessWeek back in 2005 and we’ve maintained a friendship ever since. Jonathan has opened my eyes to a number of financial concepts that illuminate marketing trends, including the critical rise of intangible assets as we’ve shifted away from a manufacturing economy.

I’ll be writing a string of posts in conversation with Jonathan over the next few weeks on marketing finance and social media, focusing on the fundamentals marketers need to understand to escape the Cult of Marketing ROI and develop a strong partnership with their CFO. We’re jointly fielding a survey on Social Media Metrics, and Jonathan will be my guest this Friday at the San Francisco Social Media Breakfast. There are a few seats left for the breakftast, which you can pick up online.

Photo credit: allspice1

Return on Customer ROC(SM)

When I went off on a rant the other day about social media metrics, I stepped on some unexpected toes. In casually dismissing all kinds of derivative ROx metrics, I also impugned ROC–the "Return On Customer" metric proposed by Peppers and Rogers. Don Peppers came to set me straight on ROC. He posted a comment defending the integrity of ROC and explaining its value:

"..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."

I couldn’t agree more about the value of customers. And when I read the opening chapter of Return On Customers, I can say that I agree wholeheartedly with the underlying premise that businesses need to take a much longer view of how they create value and how they treat their customers in the process. But there’s a thread that runs through the book that leaves me unsettled. It’s too shiny. Right down to the conspicuous trademark that declares ROC(SM) as intellectual property. It’s evident that ROC isn’t so much a theory open to professional discussion as it is a product, and one designed to generate substantial revenue.

Now don’t get me wrong. If I could figure out a meme that could sell thousands of books and bring business to my door, I’d be ecstatic. Peppers and Rogers have done it not once, but numerous times, with One-to-One marketing, with Managing Customer Relationships (CRM), and now with ROC. Their marketing effectiveness is genius. But that doesn’t mean that ROC as a financial metric stands up the hype. And that’s what I want to explore in more depth, starting out just with the bit that Peppers cites in his comment:

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.

I must be missing something. This is simply capital budgeting. Yes, most marketers need to get up to speed to understand finance, but are you actually saying a CFO wouldn’t be able to figure out such a financial insight without ROC(SM)? Or is ROC just a concept for marketers who don’t understand finance?

The difficulties continue the more you dig into the numbers. A big part of ROC relies on another metric called Customer Equity, which would be a great metric of actual customer value, if mere mortals could actually measure it. But it’s much more difficult than it sounds to match up the theoretical value of concepts like customer equity, or even customer lifetime value, with the practicality of actually measuring it. And that, in the end, is my whole point. The theoretical concept behind ROC(SM) is something many intelligent people have argued from many different angles–companies need to value their customers, they need to measure the value customers generate, and they need to sustain those efforts beyond our quarterly-driven myopia. But supporting those theories with financial constructs opens those metrics up to honest and professional criticism. And I can think of no better way to leverage our emerging social media networks to do just that.