Return on investment (ROI) has become a favourite metric in news articles, blogs, and case studies to prove how effective a specific marketing activity is. Measuring each marketing activity is crucial for improving performance. However, ROI has become a marketing slang, rather than a metric we could all relate.

Here are some confusing numbers that had inspired me to write this article. All these numbers were published in marketing articles to boast about the success of a particular medium. Some of the results differ more than 16 times, and that begs the question: if one medium’s effectiveness is 16 times lower, why bother with it?

 

Media ROI, for each £1 invested Source
Email marketing

£32.28

DMA’s Marketer Email Tracker
Online Display ads

£1.94

Nielsen, Sainsbury’s and Nestle
Cinema advertising

£2.84

Cinema Advertising Association

Online influencers

£8.81

Marketing Week
TV

£4.2

Statista

 

The answer is complicated as ROI number on its own does not give any clear indication of success. There are a couple of issues that muddle clarity of ROI: different companies measure ROI in different ways, and it’s too simple to deliver higher ROI while at the same time deliver less profit.

Different ways of measuring ROI in marketing

Metrics, in general, are used to compare two or more activities or items, but to do it effectively tools of measurement should be the same. A traditional ROI measurement can be calculated as follows:

ROI = (profit made from activity – investment) / investment

Unfortunately, a specific product’s profit margin is a financial secret that is very rarely shared inside a private company, while third parties are barred from these financial details completely. Therefore, third parties that provide marketing services and that are eager to demonstrate their high competency through delivered high ROI for other clients, use other available data. Quite often it is either revenue/sales or a proxy measurement such as past average revenue per lead multiplied by a number of leads that a campaign has delivered.

The example below clearly shows how a profit margin can change the effectiveness of a campaign. Without knowing the profit margin, both campaigns look identical and deliver the same revenue. Though socks campaign is profitable, the gloves’ campaign is a waste of time and resources.

 

Socks Gloves
Campaign costs £50 000 £50 000
Extra units sold 120 000 120 000
Unit price £3.99 £3.99
Profit margin 20% 10%
Revenue £478 800 £478 800
Campaign GP £95 760 £47 880
ROI profit 92% -4%
ROI revenue 858% 858%
Profit £45 760

-£2 120

 

Delivering higher ROI at the expense of profit

ROI is a proxy metric that shows the ratio of profit and investment in percentage points. Therefore, smaller campaigns despite delivering lower profit can deliver a higher ROI. This tactic of focusing on ROI rather than profit can lead to smaller campaigns that reach smaller groups of people. In fact, as Byron Sharp’s book Marketing: Theory, Evidence, Practice states: it is possible to deliver nearly infinite ROI by slashing all marketing department.

 

Don’t share ROI

It’s good to know that there are no clear rules for measuring ROI. We can always ask how it was estimated. Moreover, it is feasible for a company to assess it in different ways, but the catch is not to weigh up differently measured ROIs as equals. It is possible to develop an ad hoc ROI measurement and use it only to track one activity. That could help see incremental changes of just that particular activity.

However, no one should share that ROI number as a proof of effectiveness nor compare it with other ROIs without knowing how it was calculated in the first place. It is worth remembering that the role of marketing is to deliver higher profits, not higher ROI.