roi: just a stalling tactic?

Beth Harte has a great post about ROI and digital/social media, and suggests that most marketers won't have what they need to actually calculate ROI anywhere in the near future. It's not about the number of fans or followers you garner. It's about net profit. And for many brands, this data is difficult if not impossible to obtain. It's also not something that other campaigns are always held up to.

So before you go ROI on your social campaigns, ask your self:
+ Are you doing the same for other campaigns, or just stalling?
+ Do you really have what you need to calculate ROI, or are you just stalling?

A great post for marketers, and a reminder on how the calculation of ROI is quite simple: ROI = Net Profit/Sales x Sales/Investment.

From @dirktherabbit


Ben Kunz said...

Mathematically this is the same formula as ROI - net profit / investment, but I quibble.

The real purpose of ROI calculations is to make choices between alternatives. If you can make 8% by investing a million in the bank, and only 6% with a marketing campaign, pure math would tell you to keep the money in the bank.

However, this is why ROI logic often fails. Marketing is a living, breathing function to keep businesses alive, so even if ROI were below the alternative "park it in the bank" rate, if you shut off marketing, you'd damage the future business. Advertising falls under marketing and social media falls under advertising (or PR, quibble), but the logic of those internal functions is the same.

It is healthy to try to determine ROI to make choices among best possible paths, but businesses must also consider:

a - is the function necessary for basic competition?
b - what is the risk if we turn off the function, and failure to perform damages other parts of the business operating system?

So it's not just what you do, or if what you do beats the other action. It's what could happen if you don't do it at all. This may be the best argument for social media.

Ben Kunz said...

Damn I meant ROI = net profit/investment. Quibbles...

Chris said...

Saw this this morning. Apparently ROI =

Beth Harte said...

[I left this comment on Ben's blog as well.]

The point of my post is that most marketers do not understand this financial equation and do not use it for marketing budgets in general. Therefore, the argument of demanding ROI for social media is a stall tactic.

I personally believe that ROI should be determined for marketing budgets. It’s the only way to hold people accountable and to prevent waste of resources. (A marketer would think twice about a fancy buzz campaign knowing they were on the hook for ROI, right?)

It is also important to clarify that the “sales” portions of the equation do not cancel each other out. It is required to have two separate calculations that are multiplied for a final percentage. Why? Because the first one is to determine the rate of profit on sales and the second is to determine the rate of capital turnover. The rate of profit on sales is influenced by things such as sales volume, price, product, marcom efforts, etc. Capital turnover only takes into consideration sales volume and assets managed. (This is basic accounting… for a CFO.)

So further to my point, without completely understanding this financial equation marketers will have a hard time providing the CFO and CMO with an ROI. Hence my argument for why the ROI craze will fade away (when’s the last time you heard a CMO demand the ROI of an ad before placing it?).

Also, I’d question your statement that ROI is only to make choices between alternatives. That might been the norm for justifying capital purchases, but more and more ROI is being requested of the CMO for yearly budgets given.

Marketing’s function is to drive sales. Therefore, they should be on the hook for proving that they did so with the resources given and certainly providing ROI wouldn’t shut down marketing, it would force better decisions.

As I said in my post, if you don’t want to measure things like social media and PR (or find them immeasurable), at least do a brand valuation.

Dirk, thanks for sharing my post here. The ROI conversation is one we need to keep having!

Beth Harte

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