Editable Google Slide (CC-BY-4.0)
We’ve been thinking recently about ROI in marketing and what I would do if I was a CMO of a large company. This chart represents (from the process standpoint) what companies usually do (left side) to what we think is a more favorable approach to modern-day marketing (right side). We would urge more companies to treat at least a part of their marketing more like angel investors treat their investment portfolios. It is going to generate much better ROI and lead to better learning.
Marketing as Venture Investment
If we were to select the hottest buzzword that goes on and on in the business circles when marketing is discussed, then it will be ROI (return on investment). Some companies even invented special terms for the application of the ROI concept to marketing: ROMI (return on marketing investments) or ROMS (return on marketing spend).
On the one hand, whenever a business executive starts speaking about return on his marketing investment, we are happy: finally, marketing is treated as an investment and agencies can play a role of true business partners, helping clients to maximize the return on this investment. On the other hand though, we should be very careful with how we apply the concept of ROI to marketing. If we don’t do it wisely, this concept can severely damage the the creative industry and business results of our clients.
How ROI can kill innovation
Here is a simple example of how the concept of ROI can be misapplied and become destructive. Let’s say a marketing director decided to be more ROI-minded with his bubble-gum brand. She then asks a research agency to evaluate ROI on her previous campaigns for the past 2 years and based on this make a recommendation on what to invest in for the next period. Research agency comes in and does its econometrics magic (1) : they evaluate 5 in-store promotions, 4 TV campaigns, and 3 digital campaigns that happened within the past two years and correlate their performance with sales data for corresponding periods. Their findings are quite disappointing: overall the brand is base-driven and only moderately responds to communications. TV generally delivers a better increase in sales per dollar spent on media than other channels and online campaigns clearly show negative ROI. So the conclusion is that despite all the hype, digital doesn’t deliver and the research agency recommends focusing investment on TV and in-store promotion for the coming period.
There are a number of things that are wrong with this example. Let us name a few:
We run an ROI study with a pre-assumption that the only thing that only that marketing investment can bring you is an instant increase in sales. Using financial language we’re artificially narrowing the horizon of ROI that we’re looking at. And short-term investments, as any financial analyst will tell you, are generally not the most profitable ones.
The only thing that we have learned about digital is that the executions that we tried online the way we tried them – didn’t work. And we didn’t need an econometrics study to learn that. We should have known it straight-away, since digital provides instant live stats on crucial KPIs such as engagements and time spent, if not direct online sales or coupons.
Last but not least, as Bill Bernbach ones said, “The very fact that it is knowledge means that it is in the past.” What this means for us is that the fact that it did or didn’t work in the past (even if we knew that for sure) doesn’t give us enough information to decide whether this is going to work in the future. Sure, it’s crucial to learn from the experience, but it shouldn’t lead us to only trying things that have worked in the past.
All in all, if our imaginary marketing director follows the advice of his research agency, she will end up making a decision not to try new things at all. And that undoubtedly will be the worst possible decision for the long-term success of her brand.
Marketing is almost always gambling
The basic fact of life that in most cases marketing investment is a gamble. We don’t know whether the next campaign will work or not. In fact, we do know, that at least in digital – most of the campaigns that get executed by large brands are not noted by the consumers and most likely don’t generate any significant return. But a few successful campaigns “go viral” and generate return far beyond any expectations. Unfortunately, there is no sure way to predict which ones will work.
We have to rely on the available research, find a deep consumer truth, come up with a great idea, execute it well, hope for the best, and learn as we go. Most of the time we’ll have to rely on our experience and instincts.
So how do we go about ROI-analysis then? Can it inform our decision-making process if in reality it’s all about trusting our gut and hoping that this campaign will resonate with our consumers?
Luckily there is a model in the investment world that deals with high-risk, innovation-focused, unpredictable investments – and we can learn a lot from it. Treating marketing investment as venture investment can foster innovation, learning & growth.
Venture investment industry is a very interesting beast. By definition it’s high risk. You’re relying on your experience and instincts most of the time. Even for the best of the best, only 10-20% percent of the projects they invest in generate any ROI at all. But the good part is that 1-5% of all projects will generate such a return (30-100 times the invested amount) that it will cover all the fails and lead to healthy profitable growth.
As you can see, it sounds very similar to the situation marketers are facing today. Let’s explore what we can borrow from the way venture capitalists think about their investments.
It’s not about single projects, it’s about the portfolio of projects
If the chance of success for any given project is only a few percent, then the only way to consistently generate money is to have many such projects running at the same time. And then the chance that there is one that will make it within your portfolio is going to be high enough.
In fact, an academic study has shown that for an early-stage “angel” investor, the portfolio has to have about 50 projects in it so that the investor can have high hopes of generating a positive ROI (about 2.5 times on average) on his investments.
Apply this to marketing and you get intersting and pretty radical ideas:
We marketers need to accept that most of our campaigns won’t generate positive ROI. And we can live with it.
Instead of doing 3-5 campaigns a year (as media agencies advise us to do in order to break through the clatter) we might be better off having many campaigns and projects running at the same time – dropping them if they don’t work and amplifying them if they do catch the attention and generate positive buzz.
The split between production and media budgets should be re-considered. From a VC’s perspective, it doesn’t make sense to pour media money into a project that hasn’t yet proved its business model. And for us, marketers, it doesn’t make sense to pour media money into projects or ideas that haven’t been proven to be of interest to our target audience and have potential to generate return in revenue at the end of the day (if we amplify them with more media).
It’s important to have strong owned media – this will allow us to quickly develop and test ideas with our own audience before we actually start pouring media money into spreading and growing them.
We need to focus a lot of our efforts on growing and maximizing the return of those few campaigns that work. From a VC’s perspective, if a project started getting traction, the only thing worth doing is to keep investing in it and growing it. Yet this is exactly what marketers usually don’t do: they celebrate a successful campaign, then they drop it and put together a case study. We could have continued a project that was successful and grow ideas that proved relevant, rather than dropping them and focusing our efforts on starting from scratch and developing new ideas (that are likely to fail). Campaigns such as the famous Old Spice one shows us how this can lead to great results.
2% for future
We believe that if marketers start treating their job the way angel investors or VCs do, they will eventually generate much more value to the business. It doesn’t have to be that radical from the start though. What if you dedicate a small portion of your overall marketing budget, for example, 2%, and start managing it the way you would manage a venture fund? Investing in many small ideas, testing them early on your owned audience, helping the ones that succeed grow? We would bet that if you do it smartly, your marketing ROI over the course of a year on this 2% will be higher than across any other part of your marketing budget.
(1) Often times it does involve a lot of magic indeed. If you dive into the data and methodology of a typical econometrics study that research agencies deliver to their clients you are likely to find as many loopholes as charts in them. This is not always true, but beware of crucial oversimplifications whenever you look at an econometrics study claiming to analyse ROI on past campaigns.