Marketing ROI appears to be lauded as the go-to metric to measure the effectiveness and efficiency of your marketing initiatives. Though definitely useful, marketing ROI can also be misleading and undermine your brand performance in the long run. You need to make sure only to apply marketing ROI when it’s appropriate to do so.
When you hear a couple of marketers talk about measurement and metrics, odds are you will hear “marketing ROI” thrown around. It’s all the rage in the industry and appears to be the go to baseline in which every marketing campaign is evaluated on.
Though useful, it’s not as useful as you may think. In fact, applied to the wrong type of campaign it can even be counter productive.
In this article I will cover what ROI stands for in marketing, why it as risen to the standard it is held to today and in which cases you should be careful not to let it mislead you.
What does ROI stand for in marketing?
ROI is an abbreviation for return on investment. Marketing ROI is therefore simply the return you get on your marketing investments. In other words, it’s how much each dollar of marketing expenses generates in profit*. You may have also heard about this term as return on marketing investment, or ROMI. You can find out your marketing ROI by dividing net gain with marketing investment, and then multiplying it by 100 to get a nice percentage. This will tell you the profitability of your marketing initiatives.
A quick side note about profit*
Keep in mind that the profit I refer to here is not the same as the one on your balance sheet because it does not consider fixed expenses. You might attribute certain overhead costs to the calculation but for most smaller businesses this adds to the complexity. You should think of marketing ROI as a metric for the profitability of your marketing initiatives and be careful to not confuse it with your operating profit margins as it is only one component therein.
Say if you invested $100 in the creation and distribution of an ad campaign on Instagram and this campaign yielded additional revenue of $100, then your marketing ROI equals 0% because (($100-$100)/$100)*100 = 0. This means your campaign breaks even; it neither generates any additional profit but it also doesn’t cost you any money so to say and could well be a reasonable return when you have to move large volumes. Should the same campaign yield $500 in sales then your marketing ROI would be a whooping 400%. In other words, each $1 invested would generate $4 in profit.
Sometimes people say that marketing ROI should not be confused with the ROI of individual channels or campaigns because they claim marketing ROI and channel performance are two drastically different things. These are just semantics that I don’t really care about and you shouldn’t worry about them either. Just do what makes sense to you. If you want to talk about marketing ROI as the total ROI of all marketing expenses then that’s fine. If you want to zoom in on individual channels or campaigns then that’s equally good. As long as it’s clear to you.
Marketing ROI in the era of big data and digital channels
Marketing ROI looks extremely easy to measure at a glance, but when you take a look you see that it’s actually fairly complicated. The formula itself is easy enough but attributing sales to the correct marketing channel can prove to be troublesome. On top of that it can prove complex to figure out the final cost figure.
Modern marketing channels aided by big data have made marketing attribution considerably cheaper for the everyday marketer. That is, when in terms of immediate marketing ROI. But that’s only a part of the story, as you will see in a bit. Channels like search ads, banner ads, social media ads, programmatic and connected TV all offer robust metrics that makes it relatively easy to gauge immediate ROI. As a result these channels are often positioned as superior in the digital vs traditional media debate and get pushed by influential figures like Gary Vaynerchuk.
With digital channels growing in popularity each year, short-terminism in the marketing industry has probably never been higher. And this is a natural development as these channels are easy to use and they allow for easy measurement of immediate ROI causing people to focus more on short-term performance marketing. But it also means that there is a less contested area of brand marketing for clever businesses to use.
When marketing ROI can mislead you
Marketing ROI can be a very useful metric but it can also be misleading and there are a number of things to keep in mind when applying the metric to your campaigns or overall marketing investment.
Marketing ROI is a short term metric
In the simplest sense, marketing ROI is good at measuring the ROI of performance marketing but poor at measuring the ROI of brand marketing. The reasons for that is because in the long-run many other aspects contribute to marketing ROI than in the short run. Therefore you cannot measure the effectiveness of a brand marketing campaign with ROI of say 1 year because the largest chunk of the return will actually be generated in years 2 or 3 of running the campaign. On top of that, these effects are very hard to attribute as often they take the form of better response in performance campaigns, for example.
Which leads us directly to the second shortcoming of marketing ROI.
Marketing ROI creates a bias against brand marketing
Marketing ROI applied to performance campaigns does not consider the impact effective brand marketing has on conversions. It’s of course still useful to see the ROI of short-term direct response initiatives but you should also be mindful that stronger brands convert better and strong brands are built primarily through brand marketing campaigns. Hence, marketing ROI is also misleading because it creates an unfair bias against your brand marketing efforts.
Marketing ROI measures efficiency not absolute profit
Marketing ROI may also cause a sort of tunnel vision.
Because it is a ratio, it is as said before an indicator of how much each dollar invested earns you. We of course want to get the most for our money but this can create another unfavorable bias against campaigns that have a lower ROI ratio but higher absolute returns as seen on the income statement. If you only consider marketing ROI, it is likely that you will lean towards more smaller campaigns that contribute less to the bottom line, even though they are more efficient.1Sharp, B. (2018). Marketing: Theory, Evidence, Practice (2nd ed., pp. 37-38). Melbourne: Oxford University Press Australia & New Zealand.
Marketing ROI can be harmful in the long term
Focusing on optimizing marketing ROI at every chance can cause severe damage to the brand in the long term. This is likely to be especially prevalent if you sell perishable products that consumers buy repeatedly. Were you to run a price promotion, odds are your ROI would be very high but the reasons why are not because of all the new customers you are getting. The largest chunk of buyers of price promotions are actually repeat category buyers who often have even bought your brand before that simply accelerate their next purchase because they see an opportunity to get it at a discount.2Ehrenberg, A. S. C., Hammond, K., & Goodhardt, G. J. (1994). The after-effects of price-related consumer promotions. Journal of Advertising Research, 34(4), 11–21
The result is a short-term increase in volume with fantastic ROI but increased price elasticity in the long term as consumers are not willing to pay as high of a price for your product as they did before you ran the promotion.3Binet, L., & Field, P. (2013). The Long and the Short of it: Balancing Short and Long-Term Marketing.
Marketing ROI has its uses, but its also often a misleading metric. It has a biasing effect against long-term strategic marketing and brand building which can cause brands to underperfom in the long run while thinking that they are outperforming in the short run.
I’m not suggesting you should not use marketing ROI, ROMI, or whatever you prefer to label it. Neither am I suggesting that you have to use some elaborate accounting tricks to attribute every cent to costs or sophisticated big data regression models to correctly attribute returns. That’s out of your scope as a small business / startup marketer anyway.
Just be aware that despite all the hype on social media and digital marketing conferences, marketing ROI is a poor north star metric and you should not stretch it further than its limitations.
- 1Sharp, B. (2018). Marketing: Theory, Evidence, Practice (2nd ed., pp. 37-38). Melbourne: Oxford University Press Australia & New Zealand.
- 2Ehrenberg, A. S. C., Hammond, K., & Goodhardt, G. J. (1994). The after-effects of price-related consumer promotions. Journal of Advertising Research, 34(4), 11–21
- 3Binet, L., & Field, P. (2013). The Long and the Short of it: Balancing Short and Long-Term Marketing.