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Wednesday, October 19, 2011

The ABCs of ROI

ROI. Return on Investment. If you are even a casual reader of the marketing press, you will find yourself flooded with recommendations, tools and strategies that you “must use” if you are to achieve this holy grail. But before you become a lemming, you might want to consider what’s behind those three little letters, because it’s probably not what you (or those marketing articles) think. This is not child’s play.

Let’s say I am responsible for marketing a consumer service that has a recurring a revenue stream. How would I go about optimizing the ROI of my acquisition strategy? I know that before I can optimize anything, I have to be able to measure it, so let’s start there.
R = Return.
Does that mean revenue? Maybe profit? How about net present value of lifetime risk-adjusted contribution? Whoa, I think I need another cup of coffee. And I might even have to talk to my CFO.
I = Investment.
That’s the total of all my marketing costs, right? Creative, production, promotion, media, etc.  But how do I allocate costs for shared resources and capital expenditures?  What about labor and opportunity cost? What else is missing?
O = On.
This one may seem simple, but there’s a reason I saved it for last. Behind that diminutive preposition is a puzzle that has haunted marketers for ages. It’s called attribution. How do I know that the Return is actually the result of, and only of, the Investment, not just a convenient correlation? Truth is, there are numerous factors that influence every purchase decision. Understanding those factors and their combined impact across channels, time and other dimensions is often counter-intuitive and should not be taken lightly.
To avoid getting lost in this alphabet soup, it’s important to take a step back and understand (and agree on!) what you are truly trying to optimize. Using an inconsistent or incorrect yardstick might just help you do the wrong things better.

Author Larry Robiner manages client services at Pluris Marketing and tweets at @LRobiner. 

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