Return on Investment (ROI) is a hot catch phrase these days in the performance marketing industry. Everyone is talking about it and demanding it, but the problem is that most companies are thinking about it the wrong way. They are looking at ROI as a magical prospective tool that can be derived from some kind of formula, and as a result are asking their vendors to provide ROI for new initiatives before they are even undertaken. Unfortunately, this approach has multiple flaws.Since so much of marketing is about customer behavior and what customers will react positively to, both of which are very hard to predict, the old adage that “50% of our marketing is working, we just don’t know which 50%” is still very true when looking into the future. This is why innovation is extremely important in marketing. The customer landscape is constantly shifting, and a marketing campaign that worked last week may not work this week, or it may have been neutralized by a competitor. As a result, coming up with new ways to reach customers on an ongoing basis is imperative to growth, and the only way to find out if these new ideas work is to try them. When marketing managers ask their vendors for ROI predictions rather than past ROI analysis, it almost guarantees that the vendor will stick to the most conservative strategies it knows, because they don’t want to swing for the fences and strike out. The problem, though, is that 1) these conservative strategies may not work anyway, leaving the marketing manager with little real upside and a lot of downside, and 2) chances are that at least some of their competitors are innovating, and will eventually find the next big thing. Companies cannot be afraid to fail when trying new things, the issue is making sure that they can measure when they have failed. This is what analytics has brought to marketing over the past decade.
The root of this ROI problem is that many companies are confusing the ability to manage performance with the ability to predict results quantifiably in advance. While this is certainly the wrong way to approach ROI, it is understandable, as these companies are simply seeking to shift the burden of risk away from themselves or the company to vendors. However, this is an unfair abdication of responsibilities and is equivalent to asking a catalog printer to provide the ROI of a planned mass mailing, when that is not their role. In this case, the marketing manager needs to do their due diligence on the economics of a catalog mailing and the company doing the printing is responsible for making it the best it can be, not the success of the mailing.
The reality is that if a firm knew ROI in advance for each client and marketing initiative, they would be very rich and you would be begging to do business with them at pretty much any cost. Since no one can be sure of ROI without any results, they keys are to not to overspend on any channel at the outset before data comes in and to have the proper measurement tools in place to appropriately shift the resource allocation as data does emerge. As a marketing manager, focus on asking your vendors to do what they do well and put right measurements system in place before spending a lot of money on any new initiative, rather than always trying to plan ahead for ROI. Otherwise you are asking other’s to take on responsibility that is really yours and are likely to miss a big opportunity by encouraging employees and vendors to do only what is safe.