Reassessing The Classical Definition Of ROI
June 24, 2015
This blog post was inspired by one of the many conversations I have with our president, Jeff Allen. I believe this particular conversation was about a client and hints we were giving us about their satisfaction, despite the ROI being at an all-time high for their account (not just with Hanapin but prior to us also).
This blog post will go in depth about the classic definition of ROI, why it’s outdated, and the different types of ROI you should consider when determining whether an account is successful.
First, let’s define ROI. ROI is the benefit to the investor resulting from an investment of some resource. That’s from Wikipedia and not terribly helpful since it uses general words and not specifics. In layman’s terms, ROI is the return you receive from your initial investment. A high ROI means a good investment. There are several ways to determine ROI, but the most frequently used method is to divide the net profit by the initial investment. For example, if you started with $100 and finished with $120, you would divide $20 by $100 for a 20% return.
There are several advantages to using ROI to gauge your success:
- It’s accepted as a standard business practice
- It’s easily understood
- It uses readily available accounting figures
- It can be used to compare investments of different sizes
There are some disadvantages as well. A single measure of performance can result in a hyper focus on improving that single measure and neglecting other short- or long-term outcomes. This can quickly lead to dysfunctional decisions because that one measure trumps all others, even if it doesn’t consistently make sense for it to trump all others. And, unfortunately, as we’ve seen from situations like Lehman Brothers and Enron, profits can be manipulated so you can convince yourself and others you’re doing better than you really are.
Specifically for PPC, ROI has been defined in terms of increasing revenue and/or decreasing spend. The problem with this definition is it assesses value only by what you can see within the PPC account. It’s not measured by assessing neither an equivalent value in opportunity cost nor a measurable impact to the business.
Here are six additional types of ROI you should include when gauging success.
The first measure is an improvement in the company’s market position. For purposes of this blog post, this includes both market share and the types of customers you’re attracting. If your market share is increasing faster than the entire market increases, your competitors’ market share is decreasing. Over time, that creates a substantial competitive advantage for you since there are fewer competitors, which means you’re winning business a larger percentage of the time.
If the types of customers you’re attracting are now “up market,” the revenue generated from those customers will be higher and the cost of servicing those customers will be lower. Plus, what the classical definition of ROI doesn’t account for is that your employees will be happier and more fulfilled in their roles because they have less stress. They are dealing with fewer customers, but the company is making more money. This creates a virtuous cycle – the company’s margins are higher which allows it to take care of the employees better, which allows it to take care of the customers better, ad infinitum.
Harvesting Demand From Broadcast Advertising
This is a fancy way of describing the second metric to review, which is using PPC to capture more customers that were generated, but otherwise lost because they couldn’t easily find more information (or maybe just needed another touch point), from broadcast advertising like television and radio. The great thing about broadcast advertising is that while it is “interruption” advertising, which is generally hated by inbound marketers, it is still effective because sometimes people aren’t on the lookout for a product or service that can help them solve a problem because they don’t realize a solution exists.
The great thing about PPC is that because a large portion of it is search, you can harvest the demand that the broadcast advertising created. In other words, broadcast advertising and PPC can work in concert to support each other and make each other successful.
Product And Brand Stewardship
Whether they actively manage it or not, every company has a brand. Ensuring that your target audience sees the right messages at the right time is key, especially so for global companies who have enough brand recognition and awareness to measure.
For example, let’s look at Apple. It’s interesting that all Apple employees when interacting with a customer, are not allowed to correct them if they use an incorrect name. So, they may say something like iShuffle and the employee can’t correct them by saying iPod Shuffle. They do so to ensure the customer doesn’t feel bad and to also create a welcoming and not an off-putting feeling.
When Apple is talking about their own products in their advertising, they’re obviously going to use the correct names but they also take an additional step and don’t refer to their music products as MP3 players. They’ve created a new category and avoid using “MP3 players” as a way to solidify their position. You should not just use PPC to deliver the right messages to the right audience, but you should also measure the number of impressions over time that your target audience is exposed to.
There’s also a lot to be said for general exposure, influence, and engagement even if those things don’t directly generate a lead or a sale or revenue. Consumers, even on the B2B side, have a high standard for whom they give their money to and want to be introduced to a brand and get comfortable with them on their own time table and not the company’s. Even if you can measure some of this through attribution, you sometimes have to maintain faith that saying the right thing at the right time to the right people will eventually lead those folks to become customers.
Managing During Expansion
Nearly every company that hires us is a growth company in that they are actively trying to grow their company and they’re not simply maintaining status quo. How a company manages during exponential or global expansion should be another metric you consider.
There is considerable opportunity cost to executing poorly. This is true for all companies but more so for those who have venture or growth capital. If you fail to execute now and your competitor executes properly at the same time, not only are you one step behind, they are now one step ahead. Executing properly, both in terms of customer service levels and actual goals, has an ROI in and of itself simply because you’re executing, which means you’re meeting expectations and building the company and not simply fixing something that is broken or trying to catch up.
Opportunity Cost And Peace Of Mind
I touched on this in the previous metric, and opportunity cost can be expanded further. If you’re executing on your goals, what are the other things that you’re now able to accomplish because you’re not spending time “babysitting” projects or initiatives that aren’t working well and aren’t generating a return for the company?
I have never understood, and don’t believe I’ll ever understand, companies who achieve success on a particular project or initiative and then don’t leave well enough alone. By that, I mean if they are outsourcing PPC, and it becomes successful they then bring it in-house (of course, not every company does this but some obviously do). Or if you’re doing PPC in-house and it’s successful, tinkering with the formula too much by, for example, buying software to “backfill” a position if your head PPC person leaves in lieu of finding another human.
Of course, I’m not saying that companies shouldn’t try to improve upon success, but making wholesale changes to what makes something successful, when they could be building something completely new will always elude me. In other words, if an initiative is working, focus your efforts on something else versus focusing on incremental growth of that initiative. Having the peace of mind that a portion of your business is successful so that you can work on another part of your business that is unsuccessful is priceless.
Indirect Or Delayed ROI
The last metric you should review is indirect or delayed ROI. What outcome could you ultimately achieve – maybe 1 or 2 steps down the line – which you wouldn’t have been able to otherwise even if the classical definition of ROI is initially negative?
An example of this is in our own business 4-5 years ago, when we were considering whether to use software to augment our PPC management. We were deciding based on how much time we would save, which we could quantify in dollars either measuring employee salaries or amount of new business employees could take on that you wouldn’t now have to hire additional people for.
That was the wrong metric to measure. The right metric was how many additional deals we could now attract, because they required us to use software, which we wouldn’t have been able to talk to otherwise. Once we honed in on the right metric and we realized that getting access to these new customers was the right measure, the decision on whether to use software was much easier.
A good example for PPC is if your company has a distributed sales force. Because they’re distributed, they can feel like they’re not connected to the company, which sometimes makes them feel like they’re not supported either. Spending additional dollars – even if it doesn’t directly show an ROI – to have your ad show up at number one for your main keywords can have a big psychological effect on your sales force because they now believe that the “home office” is supporting them. You can make a logical argument that it doesn’t or shouldn’t matter but if you’re talking about feelings, by definition it’s hard to argue that logically so you argue the feeling they’re not being supported emotionally. They’ll have higher morale and try harder on sales appointments, which will ultimately generate your ROI.
You obviously still need to measure the classical definition of ROI to ensure you’re turning a profit, or if you’re a venture-backed company, you’re doing things that eventually lead to a profit. But having a sole focus on the classical definition of ROI can lead you down wrong roads, and not looking at the six additional types of ROI can actually hinder your overall growth and success.
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