The ROI Trap
Most marketers will tell you to measure ROI. However, most marketers will also admit that it’s pretty much impossible to measure ROI. Yet that doesn’t stop us from trying. But let me attempt to convince to stop trying. Let me attempt to convince you that ROI is a really, really bad marketing metric… at least in isolation.
Let’s pretend for a minute that you are actually able to measure ROI. You run two campaigns: Campaign A has 11% ROI. Campaign B has 100% ROI. Which campaign would you rather run? A or B? Most marketers would clearly choose 100% ROI.
But let me fill you in with some more details – and while I do, think about how ROI gets calculated. How did Campaign A generate 11% ROI? Well that campaign cost $9MM to run, and it generated $10MM in revenue. So the return is $1MM, on a $9MM investment, which is 11% ROI.
Now let’s look at Campaign B. That campaign only cost $50K, but it only generated $150K in revenue. So the return is $100K, on a $50K investment, which is 100% ROI. So now let’s revisit our original decision. Would you rather run Campaign A or Campaign B?
Would you rather generate $1MM in profit or $100K in profit? Of course everyone would rather have a $1MM in profit! This is the whole problem with ROI. It will always favor tactics that cost very little money and make very little money. Tactics like hyper-targeted ABM may have high ROI, but that does not mean they make a big impact on a business. In fact, the easiest way to boost ROI is not to grow the numerator --- it’s to shrink the denominator. The easiest way to increase your ROI is to ask the finance department to cut your budget in half. Marketers need to understand ROI is not an effectiveness metric. It’s an efficiency metric. And efficiency can be very dangerous.
When you chase efficiency metrics, like ROI, bad things start to happen. Optimizing for ROI alone is the road to ruin for a big brand. Let’s take Kraft Heinz, for example. Kraft Heinz got bought by a private equity company, 3G, which is famous for increasing efficiencies by relentlessly cutting costs. 3G decided to increase ROI by slashing all the marketing budgets. In other words, by shrinking the denominator.
And it seemed to be going pretty well for a few years. But remember that the effects of brand marketing are long-term. If you stop spending on brand today, your sales won’t decline tomorrow. But wait two years, and you’ll be in big trouble. And that’s what happened to Kraft. After a few years of optimizing efficiencies, 3G had to write off $16B dollars of value, one of the largest in corporate history.
Now what would Jeff Bezos say if we showed him that first slide, with Campaign A and Campaign B. What if you asked Jeff if he would rather have 11% ROI or 100% ROI. I’m pretty sure he would say “who cares about ROI?” Jeff will tell you that he isn’t optimizing for ratios, he’s optimizing for revenues. He would remind you that companies are not valued on their percentage margins. Your stock price is based on your cash flows – or rather – your future cash flows, which is what brand marketing delivers. And Jeff cares about cash not because that’s what Wall Street wants, but also because he can spend cash.
If you have lots of free flowing cash, like Amazon, you can spend it on growing your market share, and investing in new businesses. If you become the market leader, you will discover that there all kinds of advantages to being #1. The market leader has higher loyalty. The leader has leverage with distributors. The leader can raise their prices, like Amazon did recently. All of that translates into more cash, which the leader can spend on maintaining their position at the top.
When it comes to measurement, marketers need to prioritize effectiveness over efficiency. Get big first, and then worry about your margins. We need to stop prioritizing efficiency metrics, like ROI, and start prioritizing effectiveness metrics, like eSOV. eSOV is share of voice in excess of your share of market. You want your share of voice to be higher than share of market.
Our econometric research with Binet and Field has showed, at the highest confidence levels, that for every 10 points of additional eSOV, you get 0.7% growth in market share. The more customers you reach, the more customers you acquire. So instead of ROI let’s start talking about eSOV! Marketers, this is how you avoid sticking your fingers in the ROI Trap!