Weeks ago I was having lunch with a young colleague. He was beaming. The young man gleefully announced that his latest marketing campaign got him $140,000 in new business and only cost him $70,000. “We generated 100% ROI.”
My reaction might have been a smile, but it was more of a grimace.
The poor guy had made a major and common mistake. As with any business, there are expenses. He had mistaken revenue for profit. When you factor in his profit margins, his Return On Investment could be anything from 50% to nothing at all.
Finding your true ROI can be a tricky game. The math may be more complicated than my young agency owner, but it can be done and used as a vital tool in your business. Here are a few mistakes that people commonly make when calculating their ROI.
Playing down the costs: There are direct costs of any marketing efforts, but don’t forget the indirect costs of wages, benefits of the employees involved in the marketing and other overhead.
Playing up the benefits: When well executed, many campaigns will improve your morale, work environment and reputation. But there are usually more than one marketing effort going on at one time. If you don’t make any attempts to isolate the impact of the marketing effort you’re measuring, you may be overstating the benefits.
That pesky inflation thing: When projecting your benefits years into the future, don’t forget a very important factor: It’s in the future. A dollar even a few years from now will be worth less than it is now. Factor in a discount on future benefits and your numbers will be much more accurate.
Forgetting to get metric consensus: With any large effort, there will be stakeholders, many stakeholders. Be sure to collaborate or at least seek approval of the metrics you are using to gauge your success. There’s nothing more disappointing than spending hours calculating your ROI only to have a person who wasn’t involved tear it down. If you get people on board at the beginning, they will still be with you in the end.
Seeing all benefits as quantifiable: When certain metrics aren’t easy to measure, like increased sales or additional projects, they aren’t easy to estimate. Others, like professional development of the team, simply aren’t. Now this doesn’t mean that you can’t measure these benefits, just know that when your metrics aren’t very measurable, your precision on your ROI reporting will be diminished. It’s up to you on how and what you wish to measure.
Having your ROI influence your budget: Your ROI should never be used when calculating your future budgets. It is a recipe for failure. The ROI for a campaign is a gauge on past successes to predict future potential. Your ROI is a report, not a crystal ball.
Measuring what can’t be measured: When your evidence may be suspect, when your outcome metrics are nowhere to be found, or when you can isolate this marketing effort from others, calculating your ROI won’t be worth the effort. And that’s OK. This is advertising; there are things that you should still create, even if you can’t measure them.
Measuring your ROI isn’t easy. It isn’t perfect. You may see it assume sort of mathematical dark magic. You may see it as the vital tool for insights that will lead to smart future business decisions. Either way, when you choose to measure ROI, make sure you avoid the pitfalls.
Get a better return on your ROI reporting. That way you won’t spout off false results at a business lunch. Although in that particular instance, I tried to cheer my young friend up by taking care of the check.
And I didn’t bother trying to calculate the ROI on that decision.