The unROI of inaction

Beth Harte makes a strong case that ROI often can’t be calculated for any marketing campaigns, because isolating the financial data for ROI = (net profit / sales) * (sales / investment) is usually difficult — and thus it is unfair to hold social media to a “prove the ROI” standard. We responded over at the Brandflakes blog:
Mathematically this is the same formula as ROI = net profit / investment, but I quibble. The real purpose of ROI calculations is to make choices between alternatives. If you can make 8% by investing a million in the bank, and only 6% with a marketing campaign, pure math would tell you to keep the money in the bank.

However, this is why ROI logic often fails. Marketing is a living, breathing function to keep businesses alive, so even if ROI were below the alternative “park it in the bank” rate, if you shut off marketing, you’d damage the future business. Advertising falls under marketing and social media falls under advertising (or PR, quibble), but the logic of those internal functions is the same.

It is healthy to try to determine ROI to make choices among best possible paths, but businesses must also consider:

a – is the function necessary for basic competition?
b – what is the risk if we turn off the function, and failure to perform damages other parts of the business operating system?

So it’s not just what you do, or if what you do beats the other action. It’s what could happen if you don’t do it at all. This may be the best argument for social media.

Image: JobotDaRobot

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

2 thoughts on “The unROI of inaction

  1. “and thus it is unfair to hold social media to a “prove the ROI” standard.”

    My friend, you put words in my mouth…I did not say that. But, I quibble… 😉

    The point of my post is that most marketers do not understand this financial equation and do not use it for marketing budgets in general. Therefore, the argument of demanding ROI for social media is a stall tactic.

    I personally believe that ROI should be determined for marketing budgets. It’s the only way to hold people accountable and to prevent waste of resources. (A marketer would think twice about a fancy buzz campaign knowing they were on the hook for ROI, right?)

    It is also important to clarify that the “sales” portions of the equation do not cancel each other out. It is required to have two separate calculations that are multiplied for a final percentage. Why? Because the first one is to determine the rate of profit on sales and the second is to determine the rate of capital turnover. The rate of profit on sales is influenced by things such as sales volume, price, product, marcom efforts, etc. Capital turnover only takes into consideration sales volume and assets managed. (This is basic accounting… for a CFO.)

    So further to my point, without completely understanding this financial equation marketers will have a hard time providing the CFO and CMO with an ROI. Hence my argument for why the ROI craze will fade away (when’s the last time you heard a CMO demand the ROI of an ad before placing it?).

    Also, I’d question your statement that ROI is only to make choices between alternatives. That might been the norm for justifying capital purchases, but more and more ROI is being requested of the CMO for yearly budgets given.

    Marketing’s function is to drive sales. Therefore, they should be on the hook for proving that they did so with the resources given and certainly providing ROI wouldn’t shut down marketing, it would force better decisions.

    As I said in my post, if you don’t want to measure things like social media and PR (or find them immeasurable), at least do a brand valuation.

    Thanks for the platform to continue the discussion!

    Beth Harte

    P.S. I’ll share this response on Brand Flakes as well.

  2. Beth, this is a great comment and I appreciate the elucidation on why the ROI formula needs two components.

    I do believe the basic function of ROI — which is typically brought up in a forecasting request *before* an initiative receives a commitment — is to anticipate the return of one choice over another. The root of the ROI question is should we go ahead, or not? Do we invest here, or there? Social media is a new choice for organizations; leaders unfamiliar with what it is and how it works fall back on demanding numbers forecasts; and the numbers, as you suggest, are not easily forthcoming.

    The only reason to measure something is to take action. Measuring or forecasting ROI means using that metric to make a choice. I believe, though, that boiling the complexity of moving into social networks down to a simple number is an error in logic, because it fails to account for the waves of complexity in customer service, risk mitigation, complaint discovery, public relations, sales support, building awareness, and thousands of other ripples across the competitive landscape.

    Again, great conversation, and my apologies if I slightly misconstrued your point.

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