As business leaders, we know the value of the Return on Investment (ROI) metric to help us make decisions. It’s probably safe to say that it’s one of the most straightforward and most-used decision-making tools available, and we all are hooked on ROI.
But today, I want to suggest that you don’t want to be hooked by ROI.
As powerful (and simple) the tool is, I believe it’s often misunderstood, abused, and over-used.
Let’s say you have a business with a gross margin of 30% and your business revenue last year was $10 million. Your head of marketing comes to you with a well-thought-out, credible marketing plan that suggests she can take the business revenue to $13 million this year if her marketing budget was $1 million. Would you approve and fund her marketing plan?
The chances are that most people will consider this to be an excellent way to grow. After all, by spending $1 million, you will increase your revenue by $3 million — an ROI of 300%.
But wait. Your incremental margin (at 30%) is only $1 million. So, you are spending a million to get a million. That is an ROI of 100%, right? It’s less than what you first thought, but still not too shabby.
But wait. If you take out a million from your bank to fund this marketing plan, you have an excellent chance to be able to put the same million dollars back in your bank account at the end of the year. A bird in hand versus a bird in the bush!
Perhaps it’s not such a good idea after all!
What I just demonstrated to you is how ROI is misunderstood and abused.
Now, let me share another real example demonstrating how it is over-used.
If you have ever driven on Route 101 between San Francisco and San Jose (in either direction), you have probably noticed about a dozen billboards advertising Apple iPhones most often under the headline of “Shot on iPhone.”
Do you think Tim Cook has ever been told precisely how many additional iPhones were sold due to those billboards? It’s safe to bet that there’s no way anyone can reasonably attribute incremental sales due to these billboards.
So why, with no measurable ROI, is Apple continuing to spend millions of dollars on this marketing expense? They are doing so because they know that traffic continues to worsen, and more and more people are spending more time on 101. Reaching potential customers (i.e., Android users) and current iPhone users to remind them of all the fabulous photographs they can take with an iPhone is a great marketing tactic. Even though precise ROI cannot be calculated, it’s smart to reach people when they are stuck in traffic.
Now you understand why I don’t want you to get hooked by ROI.
ROI is a wonderful tool for business decision-making. But like any great tool (e.g., a surgeon’s scalpel), one should know how and when to use the tool, understand its limitations, and know when not to use it.
Learn about “Fake ROI” and other potential pitfalls often promoted by less-than-scrupulous marketers at NCET’s Biz Bite on March 23.
Learn about why you don’t want to get hooked by ROI at NCET’s Biz Bite on March 23. NCET is a member-supported nonprofit organization that produces educational and networking events to help people explore business and technology. More info at www.NCETbite.org
Atul Minocha is a partner at Chief Outsiders (www.chiefoutsiders.com), and author of Lies, Damned Lies, and Marketing, an Amazon best-seller and #1 book recommended for “entrepreneurial success” by the Forbes magazine.
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