Return on Investment. It’s often talked about as a ‘Business metric’ but really, it’s something we do ourselves every day. Except in daily life we say, or think, “Is it worth it?”
That could be buying something like:
Should I buy this 2-litre bottle of cola or that one? That one is on Buy-One-Get-One-Half-Price. Hmm how much do you save? £1. But I do slightly prefer the other one. Still £1 is £1.
Or doing something like:
Am I going to go to the Johnson’s party? Well, it’s an hour’s drive. But it IS their wedding anniversary. So, I SHOULD. Though I don’t see them that often these days since we moved. How would it look if I don’t? What would I do otherwise, well there is that film on… I’m pretty tired, it’s been a long week. But I did say I would go when they invited me 3 months ago. He’s good fun. I’ve never really liked her though. Or her brother.
It’s a complicated calculation, isn’t it? Full of tangible and intangible considerations to decide if it’s “worth it”.
And that’s what we try to do with ROI calculations. We assess what an activity cost us and what we got back to decide if it was worth it. If we should do it again or invest our resources differently. Which is exactly what we are doing every day in the examples above. In the same way, in business, our resources might be money or even our time.
So, the calculation is:
And, just like in the examples above, the calculation is not difficult because of the investment aspect. We know how much we are saving on the Cola and we know how long it will take to go to the party. What we find hard to assess is the return aspect. How much worse is the other cola, or how bad will it look if I don’t go?
This is where, in marketing, econometric modelling helps a lot. We know how much an activity cost us to do. What we don’t understand so well is what it gave us in return. Often that’s a complicated thing to isolate. There were probably six other things going on at the same time that could have affected sales, so how do we isolate the incremental effect of our activity? Luckily that is what econometrics does very well, through a statistical process of analysis. And we can ‘point’ the analysis at whatever KPI we like. That could be as simple as sales, but if the objective of the activity was something different, for example website visits or brand awareness, then we can measure the effect on those KPIs. In fact, we would argue when we are trying to decide if something is ‘worth it’ then the first step is to agree on what we expect the result to be.
Knowing the ROIs of different activities also helps a broader conversation about investment decisions going forward. It should never just be as simple as saying, “Activity X has a lower ROI than Activity Y so we should cut it.” Going back to our time discussion, it may be that Activity Y takes twice the time and effort to implement. But without that decision being grounded in fact then it’s impossible to make those choices. It’s like thinking about the party but not knowing if the party is next door or a 4-hour drive away. That fact, like econometrics, doesn’t make the decision for you, but it puts you in a much better position to make that decision an informed one.
So, if this has stimulated your interest in knowing more about ROI, do have a read of our latest ebook, The Big Book of ROI. It tells you all you need to know about ROI, well at least what we think you need to know. And best of all, it’s free. So, no difficult cost decisions to make there about the ROI.
Tom
