The ROI Trap—what marketers should know about this important metric

By Lauren Bolles and Erin Thrope

Return on Investment (ROI), the holy grail of finance metrics, is often a sign of low sophistication in marketing efforts. In the advertising world, return on ad spend is often referred to as ROI. This usage of ROI is only looking at sales revenue and ad spend, not taking into account the cost of the sale or any other costs beyond advertising spend. In isolation, ROI can be a dangerous metric which can lead to poor business decisions for three main reasons:

•     Chasing ROI can lead to underinvestment
•     The highest ROI tactics often have low incrementality
•     The focus on high ROI prevents growth

Profitable revenue – not marketing ROI – should be the goal of marketing campaigns. It’s a balancing act between volume and efficiency, but when both are engaged and measured holistically, companies stand to maximize sales and grow share.

1. Chasing ROI can lead to underinvestment

In a lot of contexts, striving for a high ROI is ideal. Within digital marketing, a high ROI often means there is room to grow investment and bring in more overall revenue. Usually, a high ROI means a brand has not reached the point of diminishing returns within that particular media channel which leaves impressions, clicks and revenue on the table. Because higher ROI often happens at lower spend levels, it’s fair to say companies are chasing efficiency but are sacrificing volume. For example, one would think a 400% ROI is superior to a 100% ROI, but at the lower ROI the company brings in $45,000 of additional sales.

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Put another way, the easiest way to increase ROI is to simply to cut spend. If a campaign is below an ROI goal, one of the “oldest tricks in the book” is to cut spend and let latent conversions accrue. Since latency (the time between ad exposure and conversion) exists in digital media, it can take up to 30 days or more to see results from past marketing activity. If ROI is below goal, campaigns managers have been known to decrease spend and let these conversions naturally occur. This can create huge improvements in week-over-week ROI, but they are actually doing a disservice to the campaign by cutting investment. This is a Band-Aid to boost ROI in the short-term, but ultimately results in less overall revenue.

2. The highest ROI tactics often have low incrementality

In addition to underinvesting, chasing the highest ROI tactics can also lead to investing in areas with low incremental value, meaning many of the customers would have purchased a product whether or not they saw the ad. Advertising tactics such as branded search, display retargeting and email are examples of advertising to audiences with an already high intent to convert. While these marketing initiatives generate some sales that would not have happened without a consumer seeing the advertising, all revenue from these audiences will be attributed to the marketing tactic (incremental or not), thus leading to an inflated in platform ROI. Further, when budget is limited, allocating advertising investment to audiences who are driving minimal incremental sales prevents investment in net-new audiences actually leading to growth.

3. The focus on high ROI prevents short and long term growth

Companies who fall into the ROI trap cut tactics not showing immediate ROI in-platform, but this is short sided. Lower ROI tactics have value not accurately captured within in-platform metrics, especially in-platform ROI.

•     Some important elements of digital campaigns are not able to be measured in-platform. For instance, digital platforms more narrow view of measurement does not account for cross-channel lift, in store purchases, or any other impact that happens in another channel or device indirectly assisting the sale.
•     Acquiring new customers is generally more expensive than marketing to your current customer base. Optimizing to high ROI tactics leads to cutting out new customer acquisition spend, which is important to growth. Other metrics, outside of ROI, need to be used to measure customer acquisition and brand awareness growth, such as a brand lift or sales lift study to measure media effectiveness.

These lifts can be assessed through proper testing or marketing-mix modeling, not in-platform ad consoles. If brands keep cutting tactics not meeting immediate ROI goals, investment drops. When companies spend less, they make less.

Additionally, many marketers tend to overinvest in easy-to-measure channels (search, affiliate, email, remarketing) and underinvest in awareness tactics (online video, television, radio, social), which are valuable tools in the marketing kit. If companies only invest in what is easy to measure, they will not reach new potential customers who fuel growth.

What metric should marketers use?

Instead of chasing high ROIs, focus on maximizing revenue while maintaining profitability. It’s the sweet spot of maximizing volume without eclipsing the breakeven point where marketers invest more than customers are ultimately worth. Have a conversation with marketing and finance about setting the right ROI goals, not just high ones, using product margin and customer lifetime value as inputs. Further, ROI goals should be different across products, audiences and channels. In this portfolio approach, they should meet the objectives of the business. ROI targets, like everything else in the campaign, should be calibrated based on the profitable revenue goal and overall business strategy.

For example, consider lowering ROI goals to grow market share or acquire new audiences, and raise ROI goals when trying to hit profitability targets. Some products are loss leaders when companies are trying to enter a new space or gain share, while others need to carry the portfolio with high margins and repeat purchases. In aggregate, these should ladder up to a blended ROI goal financially healthy for the business.

Consider this hypothetical: if a company spent $10MM in marketing but made $12MM in profits, it’s still profitable in aggregate, regardless if individual campaigns were ROI-negative and others ROI-positive in-platform. If that company only invested in ROI-positive tactics, it would have been able to spend $5MM and bring in only $8MM, a $4MM shortfall.

Within a marketer’s toolkit, ROI varies greatly by channel and role in the customer journey. For example, broadcast tactics like television and radio produce mass reach but are considerable investments; however, they are often the first exposure to a brand or product. But it’s usually the media channel closest to the conversion, such as brand search or remarketing, that reap the in-platform credit for the sale. In reality, it is the combined efforts across the customer journey that result in the sale.

In summary, profitable revenue – not ROI – should be the chief ambition of marketing campaigns and successful marketers should leverage a combination of mass reach and ROI-positive tactics to achieve business goals. It’s a balancing act between volume and efficiency, but when both are engaged and measured across a blended portfolio, brands ultimately make more money.