Should ROI Be Used to Measure the Effectiveness of Marketing Programs?

May 3, 2018

In the article “Marketers Continue to Push Ahead To a More Holistic Attribution Practice,” eMarketer reported on an IAB poll that showed 73% of Media and Marketing practitioners were looking for better marketing measurement. Typically, that measurement revolves around one thing—Return on Investment, or ROI.

The question is whether ROI should be the primary metric used to determine the success of all marketing and media activities. According to The Ehrenberg-Bass Institute (EB) in their article “ROI Can Send You Broke,” (also written about at length in Byron Sharp’s Second Edition of Marketing: Theory, Evidence, and Practice) the answer is most likely “no.” However, before we look at the metric more closely, what is ROI. Here’s is EB’s definition:

ROI is a simple equation that results in a percentage….the contribution to profits that is returned from the marketing ‘investment’ and divide it by the cost of the investment: ROI (%) = profit contribution/marketing costs.

….A direct marketing campaign that cost $80,000…our investment is $80,000. If that direct marketing campaign sold one million extra products on which we earn twenty cents in profit margin for each unit sold, we have a return of $200,000

200,000 ÷ 80,000 = 2.5 (or, 250%)

The equation and the definition seem straightforward enough, but there are a number of problems with using it to measure marketing success. First, the problem of effectiveness versus efficiency (we see similar issues with campaign sales lifts):

Marketing expenditure is only a part of a company’s total expenditure….What matters is how effective it is, not how efficient it is. An ROI of 1.5 (150 per cent) on a million dollar campaign is $500,000, while an amazing $5 (500 per cent) ROI on a $10,000 campaign is still only $40,000.

What does this lead to? Possibly smaller campaigns (since it’s easier to drive higher ROI using small brands) and cutting marketing expenditure:

Concentrating on ROI tends to encourage smaller campaigns, as these are more likely to generate higher ROI….It can also encourage cutting marketing expenditure…it’s possible to deliver infinite return on advertising expenditure by slashing advertising to zero.

Finally, you can increase ROI by focusing on heavy buyers:

ROI tends to encourage campaigns that target existing customers, and heavier customers. These show higher ROI largely because many of the sales aren’t really extra sales but sales that would have happened anyway….ignoring light buyers of the brand prevents growth, and encourages erosion of market share.

KEY TAKEAWAY:

The use of ROI to measure the success of marketing campaigns potentially undercuts the true metrics of marketing success (increasing penetration/buyer base) by focusing investment on small brands/campaigns (which have a higher likelihood of showing a higher ROI) and targeting a brand’s current/heavy buyers. Instead, focus efforts on market penetration and mental/physical availability.