The ROI black hole: are you training consumers to cherry-pick?

Marketers using ROI as a planning metric for decision making will not see as much as they’re hoping for, writes Rob Pardini.

Rob Pardini Headshot copyOne of the most vexing questions I’ve ever been asked in a business meeting is “what will be the ROI from using an ad server”? It’s almost on a par with an enquiry about the ROI from fixing a leaky roof, or from getting the toilets cleaned.

Not very long ago the marketing profession was frequently bemoaned for lacking commercial accountability. Whilst this criticism could still be levelled against some in our industry, over recent years, others have gravitated to the opposite end of the spectrum and become fixated with ROI.

This is most prevalent in companies that go down the path of zero based budgeting (the starting point in the budgeting process is zero investment, and marketing funds are only committed based on evidence of the ROI that will be delivered).

When companies become stuck in an ROI black hole, the question ‘What ROI will that deliver?’ gets asked repeatedly about everything that has a cost attached. Media channels, vendors, tactics, day parts, geographies and technology platforms are all repeatedly paired with the ROI question.

I’m sure many people nod enthusiastically at the suggestion that marketing funds should be allocated based on the business return that will be delivered. However, treating ROI as the only metric that matters when making marketing decisions almost inevitably delivers below-par ROI over the long run.

In many cases, a fixation with ROI leads to a pattern of amplifying aggressive pricing or other short term offers. As this encourages consumers to only purchase on promotion, it erodes margins and eventually leads to a negative business return.

Once consumers have been trained to cherry-pick, it becomes extremely hard to change their behaviour, and companies too far down this path find it almost impossible to change course.

 

It’s important to draw a distinction between ROI as an objective of marketing, and using ROI as a planning metric for making decisions about every cog in the marketing mix. Demonstrating that marketing investment is driving a long run business return is essential for credibility with the CFO and CEO.

Understanding long-run ROI is also an important sense check that the operational levers within the marketing mix are working effectively.

However, with the exception of pure direct response businesses, ROI is too blunt to guide granular planning and optimisation decisions about tactics, channels, vendors, day parts, investment weights and other variables at the campaign level.

For example, a campaign might be highly successful at driving prospects to an ecommerce site, but if the on-site user experience is poor, the ROI will be low. It doesn’t take an Einstein to work out that it would be better to fix the onsite experience than conclude that the campaign failed.

 

There are other severe flaws with ROI-based planning. Channels, messages and tactics that have yet to be used have unproven ROI. In a fragmented landscape, there are more possibilities than can ever be tested, so there is always incomplete data on ROI. Media costs and audience behaviour also constantly fluctuate, making past ROI an unreliable proxy for future returns.

Even more importantly, ROI-based planning assumes that each variable in the marketing mix is a stand-alone lever driving ROI, while purchase behaviour is usually driven by the consumer experience across all touch-points, often over long periods of time.

Instead of obsessing about the ROI that each cog in the marketing mix delivers, organisations should make decisions about channels, weights, messaging and other variables based on the role they will play steering potential customers through each stage along the customer journey.

The starting point is to identify the metrics that matter at each stage of the journey. This produces a set of metrics that ladder through to commercial objectives, which provide a yardstick on performance against each key marketing task.

 

Regarding measurement, companies looking to drive long run ROI should prioritise developing advanced reporting capability that provides end-to-end visibility across these metrics in near real time.

Visibility on the impact of marketing on the number of prospects moving through each stage towards the point of purchase is essential to enable marketing agility.

These key linkages also provide a far more robust framework for scenario planning than bluntly linking marketing investment to expected financials outcomes.

Whilst a framework for guiding customers towards the point of purchase spans both online and offline, the potential gains from a customer-journey-centric approach to optimisation are particularly pronounced in the digital ecosystem where segment-of-one targeting at scale can be achieved using triggers in tandem with advanced segmentation (and dynamic creative).

Messaging that is customised to the stage the prospect is along the customer journey is indispensable for a relevant, personalised, engaging experience.

By providing end-to-end visibility of the metrics that matter, a consolidated marketing view aligned to the customer journey is a key enabler for driving long run ROI improvement. However, very few senior marketers in Australia currently have this level of visibility. It often takes days or weeks (and briefs to multiple colleagues and agencies) to pull together hard numbers on where marketing funds have been invested (across offline, online and trade), and how each key response metric along the customer journey has performed.

For companies focused on ROI, adopting a planning framework grounded in the metrics that matter is almost guaranteed to deliver holistic, long run ROI improvement.

 

 

Rob Pardini is chief data scientist at WPP AUNZ

Further reading

 

 

Image copyright: dracozlat / 123RF Stock Photo