Is ROI a 'false friend'?

The disconnect exists even within marketing. ‘Do you mean campaign ROI or overall ROI?’, ‘ROI on profit or revenue?’. It has been exacerbated by the so-called measurability of marketing activity through attribution. We’ve seen some phenomenal channel or digital campaign ROI numbers becoming the norm – and expectation – but they weren’t reflective of the true picture across all marketing activity. Because channels almost never operate in isolation. A brilliant result for search may have taken no account of the TV advertising that prompted the search. In fact, the search may have been completely incidental – ‘in the path’ but not ‘impacting the path’.

Now though, we’re all looking to methods such as marketing mix modelling (MMM) again, where we do see ROI holistically. Importantly, MMM seeks to understand the causal relationships between marketing activities and growth, which tracking alone is unable to achieve. It is often referred to as incrementality.

Here are five things CMOs and CFOs can do to help each other:

1. CMO-->CFO training on the value of brand, marketing, incrementality and ROI

When using MMM for measurement, you no longer need to brush off brand building activity as unmeasurable. The strength of brand driving marketing tactics both should and can be quantified.

Understanding incrementality was attribution’s biggest miss. Budgets can only be allocated with a holistic view of the incremental ROI of channels or campaigns.

To understand ROI properly, it’s essential to understand the measurement methodology. A reset here means explaining that attribution returns are not ROI. CMOs will then need to build confidence in MMM outcomes.

What’s more, marketing drives value. Yet it is almost always viewed as a cost centre. Perhaps that means persuading your CFO friends that it’s not about minimising operational expenditure, or opex. What if we think of investing in measurement as we do other assets that are considered capital expenditrure, or capex, with a longer term view of it as a generator of ROI?

2. CFO-->CMO training on investor or valuation messaging

For plcs especially, there is a perpetual need to show growth to investors, which means that CFOs focus on the bottom line margin and its impact on the share price above all else.

This can be a source of frustration at times, particularly when a brand needs to build back from a difficult period. The need to invest more to achieve higher growth in the longer term is often outweighed by the need to manage costs and margin to a reporting period to maintain investor confidence. This is where the cost centre vs revenue generator argument can get tricky.

Private businesses often have more freedom to take a different approach, though that may depend upon whether or when they have an exit in mind.

If they are to understand each other, CFOs need to spend time with their CMOs on explaining the numbers that count.

3. Zero-based budgeting, or not?

One major sticking point when it comes to budget setting is using last year as the benchmark. It’s an easy way to build a budget, feels less threatening (less need to justify spending), but may also put a brake on capitalising on opportunities.

Zero-based budgeting – the practice of starting each budget period at zero and allocating funds based on a fresh evaluation of operational efficiency, rather than budget history – can allow for better cost management and budget optimisation. It can also be complex.

But better measurement solutions, such as using MMM, can facilitate zero-based budgeting as they deliver a more accurate view of what drives incremental sales. Whether the CMO feels under threat of having budgets cut will somewhat depend upon the measured performance, but it will certainly be fair if the measurement solution is sound.

4. Consider your planning and budget release cycles

It’s still incredibly common for both planning and budgeting to be an annual event.

However, marketing teams are increasingly moving towards more agile quarterly planning cycles that allow them to steer budget according to a host of market conditions. This gives far more control and opportunity to optimise marketing spend. A mismatch with budget release cycles may denude that agility as a path has already been set. Align them for better results.

5. Define and socialise ROI

Fundamentally, ROI focuses on efficiency. But that leaves money on the table. The best definition of ROI is one that understands the relationship between incrementality, where the next marginal returns come from (mROI), and driving towards hitting and exceeding targets.

Calculating mROI can be a bit complicated; but remember that an over-simplified approach to the definition of ROI could result in a skewed view of reality.

As a first step, if every team in every department are to speak the same language, get clear on what ROI means in your business. Then share the definition widely and stick to it.

The opinions expressed here are those of the authors and were submitted in accordance with the IPA terms and conditions regarding the uploading and contribution of content to the IPA newsletters, IPA website, or other IPA media, and should not be interpreted as representing the opinion of the IPA.