Economics & Research Blog
Does ROI Miss the Mark? Is ROT Better?
A recent Advertising Age article indicated that major consumer package goods companies have talked about the importance of ROI,
By Dr. Joe Webb
Published: May 20, 2010
A recent Advertising Age
article indicated that major consumer package goods companies have talked about the importance of ROI, but their agreements with their ad agencies rarely have any “pay for performance” clauses. Is all this talk about using ROI in advertising and communications just talk?
For years we have heard its importance, but the only segment of the marketing business that actually has an understanding about how to measure it is the direct marketing business. Catalogers know what they spend on printing, mailing, and other aspects of their investment, and they are fairly good at measuring what incremental business they get from their initiatives beyond what would be the normal course of business. What's the ROI of a brochure? A flyer? A sign? A poster?
The ROI mantra is justifies the size of communications budgets, and that budget allocation. Is it meaningful if no one is basing payment on it? Why is it that there is such dissatisfaction reported by executives about their abilities to understand communications spending? Does ROI matter in the way we think it does?
Return on investment
, ROI in common language, is one of those easy to calculate figures in concept, but for something as complex as communications, it is quite difficult. The typical definition of ROI is the net profits from an investment divided by the total cost of that investment. It results in a percentage. Communications, however, is a continuous expense. Individual campaigns may have a calculable ROI, but total ongoing communications may not. There may be many other factors that make ROI inappropriate as well.
Another issue is that this calculation of ROI from the financial textbooks is different from that used in the printing industry. Printers will often discuss ROI in terms of what is more accurately called “payback period
.” When a printer buys equipment they will say that it has an ROI of 18 months, for example. What they really mean is not “return on” but “return of investment.”
Perhaps this is one of the underlying problems that printers have in understanding communications ROI; their customers are talking about something quite different.
But that's okay, no one knows what ROI means there either. In direct marketing, the measures are quite diverse. Average order size, response rates, sales per square inch of catalog space, and many others, have all been developed through the decades by direct marketers. Anywhere else, it was hard to determine.
For decades, the advertising business benefited from their inability to measure results. It seemed that almost anything very creative could be proposed, and if there was a sales rise, it must have been a good campaign. If the right people liked it, then it was a great campaign. Marketing research would measure other factors such as brand awareness and favorability of one brand over another. All of these took time and great amounts of money. Even then, managers would sit around a conference table arguing over slight statistical differences months after campaigns were over and done with. If sales went up, was it the campaign, or great sales management, or a weak competitor; no business is a controlled experiment. Variables change all the time, some by design, many times by chance. If the data are clear, executives can often make them seem clouded with doubt. Decades ago, the award-winning and much Alka-Seltzer campaign (“I can't believe I ate the whole thing
.”) brought the question into focus. Sales did not get the bump they expected, despite the growth in favorable brand recognition and that the tagline had become part of the national culture.
What if that campaign had been done today? Executives would have known within days if it was having the effect that was desired. This has been the great appeal of digital media: instant data. Web page hits, web page views, downloads, file opens, site visits. You name it, there's a measurement for it. Compared to waiting weeks for a mail campaign to be fully delivered and responded to, or for all the money needed to devour TV ratings and conduct awareness research, or to gather retail store sales data, digital media seem too good to be true. For businesses not in retail marketing, digital media, in many ways, offered communications measurement for the first time. And there's the possibility of an extra bonus: viral growth beyond the intended audience, a benefit with virtually no cost. In the past, they operated by gut feel (called skill and expercience), no matter how many metrics they had. And if word of mouth grew about a message, those additional fans required some kind of additional marketing support costs.
Digital media's attractiveness comes from its low cost of failure. An e-mail marketing campaign could be tested quickly and on a small scale, and tested, and tweaked, without incurring much expense. Just look at the costs of opening a Constant Contact
account and you quickly realize that there is little risk of a bad campaign. Weigh that against the costs of a mailing to even 1000 prospects for small businesses. The postage alone would be more than the Constant Contact account.
ROI calculations very often do not include a cost of risk. Every business person knows that things may not work out as intended. No one initiates a direct mail campaign, or a broadcast campaign, without safeguards such as testing, list selection, and careful audience research, before engaging in them. Digital media is a hotbed of experimentation and action based in immediacy. Failure has no significant cost in many communication scenarios. Why is there so much spam e-mail? Because the cost of failure, or non-response, is minimal.
In looking at the overall communications budget, then, what are the formats that will get the most attention? The ones with the lowest real costs with the lowest risk of failure. ROI is the attempt to understand that, even if it is based less on numbers and more on gut feel.
So when a printer commented at one of my presentations that they really did not understand this concept of ROI for communications, I realized that for most communicators, the idea of ROI is often just something they say but is more nebulous than they admit. The topic has been exacerbated by slow economic times. There are numerous articles reporting surveys of corporate CFOs demanding more accountability for marketing and communications expenditures. The same articles admit no one knew how to really do it. Digital media, however, were there. Whether the measurements were meaningful from a strategic perspective seemed to matter little. It made communications decisions defensible to a CFO audience that tends to suspect that marketing is lots of fluff and luck.
We should not worry about our supposed lack of understanding of ROI when no one else knows how to measure it anyway. We should, however, provide an alternative.
This is an opportunity. We have the chance to recommend the parameters of communications effectiveness for small and mid-size businesses, especially. We can provide guidance to businesses about communications ROI. When definitions are murky and changing, we should jump into the fray.
Rather than explaining the use of print
, we must explain the use of media
The problem is that just like communications budgets being spread over many media, so to is the attention span of target audiences, even the B2B ones. No one knows where someone will be at a particular time that they will be spurred to seek or access information. Despite the fact that research can tell you someone's preferred medium or their most used medium, we can't count on that to be true tomorrow, a year, or five years from now. Nor do we know what situation they will be in when they are seeking information. I may prefer choosing a restaurant from a newspaper review, but when I have to meet a client, I search for restaurants on an iPhone, and I can take a peek at the full menu as I make my choice. Preference is not always where the action is. Convenience can trump preference every time.
This means that all campaigns must have more than one medium. No one knows what will be convenient at a time when a decision will be made. This is where we suggest to clients that communications convenience is the real selling point of using providers such as ourselves.
A restaurant does need a website, an e-mail campaign, print advertising, listings in online and print directories, signage, and promotions. There is nothing in that list that a print business cannot facilitate. It turns out most other businesses do, too. Most businesses can benefit from some kind of video, as well. A restaurant I recently patronized had videos of each of the items in their online menu as it was served at a finely prepared table. There must, however, be a consistency of design from medium to medium for the effects of brand building to occur. This consistency is hard to achieve.
None of this is easy. None of it is new. There is nothing blocking print organizations from becoming experts at implementation of these ideas. The ideas are a strategic change. All changes have risk. The risk of staying the course are probably greater.
How many print business owners would shudder at the idea of having an e-mail marketing seminar at their facility? Probably most of them. Or perhaps a seminar about using social media in business at their offices? Unless we begin to associate ourselves with these media directly, we will not be at any table where communications decisions are made.
What is the ROI of communications? Sometimes the only way to measure it is to ask the question: “Is it worth doing this again?” For many small and mid-size businesses that investment is not a dollar amount, it is time. So the real equation is ROT: return on time for the small business owner. Is it worth the time of creation, implementation and ongoing management to continue this form of communications or not when compared to other activities? ROT for the small business owner is a measure of confidence that the time they and their workers spend will have a predictable and desirable result with as little diversion away from their objectives as possible.
The communications recipient also has ROT. For them, it is is convenience. What is the quickest and most effective way to get reliable information I need at this moment in the physical location I am presently at, and with the media delivery I have access to at this time? For the communicator, this poses a problem. In the past the communicator could control the context of the communication. Now, the communicator has to be more prepared than ever to anticipate the unknowable nature of information delivery in a constantly connected world.
The measurement tools of communications are not as good as we would want them to be. Media allocation is an art, not a science, and that art is always changing. The only thing certain is that there are many options for communications and money spent on them can be more used more efficiently than ever. That said, we are left with time, the only non-renewable business and personal resource.
So if ROI is dissatisfying, perhaps it's Return on Time that is our better approach we should be taking to the marketplace.
There are no rules. Get out and make them.