I last wrote about a means to calculate a Return on Investment (ROI) for the purpose of comparing marketing programs that may produce several outputs, some that are not directly tied to sales.
Tim Calkins and Derek D. Rucker then wrote an interesting piece challenging the application of ROI in funding marketing programs and how it is just not always the best idea.
“Don't Overemphasize ROI as Single Measure of Success"
Variety Counts: It Takes More Than One Benchmark to Assess Overall Effectiveness
Published: February 04, 2008”
I liked much of their common sense evaluation and thought this a good forum to play off their effort. Their backgrounds follow this article. (It’s pretty easy to defer to them as experts in this area.)
Like it or not, we’re in bed with ROI as a widely accepted measure to evaluate marketing programs and gauge spending levels. It’s the food of financial types, making marketing less subjective.
Perhaps more important, a good return makes it easier to defend marketing initiatives and to justify our jobs.
But to Calkins and Rucker, “there is a fundamental problem with overemphasizing ROI as the single measure of marketing success: It is often impossible to accurately quantify the impact. Although the world of marketing has come a long way in terms of analytic capabilities, applying financial numbers to the marketing equation is not always possible or preferable. That's why using ROI to evaluate the overall effectiveness can be a problem.”
Blasphemy…but, they offer proof…
”Take branding, for example. For many companies, brands are their most valuable assets. (Even if) determining the precise value of a brand at any given moment is near impossible. …brand valuation calculations generally rely on an assumption, built on an assumption, built on another assumption, built on, yes, another assumption. That means that trying to determine the impact…on a brand's value or equity might produce numbers that are directionally right but certainly not precise.”
They go on to say, ”If the value of a brand cannot be precisely calculated, and thus known, then it would appear impossible to use solely ROI to evaluate the decisions that impact the brand. Either the impact on the brand has to be ignored, which seems incorrect, or it has to be put in as an assumption, which makes the analysis suspect. That creates the potential for sub optimal decision making.”
And Branding is not alone on this. What about customer satisfaction, loyalty, employee morale and differentiation? All are important but very slippery when calculating ROI.
So, here's the danger: “A company that uses ROI to guide marketing decisions might focus only on initiatives that come with strong, quantifiable returns. The company might then reduce spending on programs that build the brand (or) increase customer loyalty and strengthen differentiation. That (behavior) increases the focus on short-term initiatives at the potential expense of more-valuable long-term gains.”
Where’s this proof I speak of?
'McStarbucks'
”There's no clearer example of this than Starbucks. Over the past several years, the ubiquitous coffee chain has rolled out a series of initiatives to boost short-term profits at the risk of potentially damaging the brand. The ROI on each decision was probably very positive. But as CEO Howard Schultz admitted, the initiatives have hurt the brand and weakened the company overall. The new breakfast sandwiches, for example, might generate incremental revenue, but leave the stores smelling like cheese factories and make the baristas feel like they are working at McDonald's. As one rather frustrated barista noted on a recent visit, "Welcome to McStarbucks."
I love these guys.
Now, we all know that regardless of the common sense uttered in this writing, our peers are not likely to allow haphazard spending on nonsense. Marketing executives should manage and be evaluated on the overall financial performance of a business.
Calkins and Rucker conclude that, “rather than focusing on ROI, executives need to use a variety of measures to evaluate marketing programs' success. Those measures should be grounded in the objectives for a particular initiative. If the goal is to strengthen customer loyalty, then loyalty should be measured and tracked. Take a more open-minded approach to measurement, first focusing on a company's objectives and strategies and then identifying measures that can best work for them. Focusing solely on ROI is dangerous and naïve.”
Could not have said it better myself. The ROI model we presented in February’s Clarity blends the academic argument with a practical need to measure traceable results. It compares marketing spend by program when awareness and any mix of other measures are desired outcomes. Is it perfect? Likely, the model has as many flaws as any. But, if the values are assigned to outputs remain consistent from one program to the next, then the model is very effective. Visit (link) and see for yourself.
| | Tim Calkins is a clinical professor of marketing at the Kellogg School of Management at Northwestern University. Mr. Calkins also serves as co-academic director of the school's branding program. |
| | Derek D. Rucker is an assistant professor of marketing at the Kellogg School of Management, where he teaches advertising strategy. His primary research focuses on the study of attitudes, persuasion and social influence. |
