Death by tools and metrics #4: ROI ~ Brand Mix

Thursday, February 14, 2008

Death by tools and metrics #4: ROI

This is the fourth in a series of posts about the dangers of blind allegiance to tools and metrics. In the wrong hands, used for the wrong purposes, they can be killers.

Today's metric: ROI (Return on investment). There's no doubt that ROI is a useful, if not critical, tool for marketers. It helps objectively evaluate the relative benefits of different marketing options and it creates a common language between marketing and finance. But here's the problem. People can get so enamored with ROI that they want to use it for everything to the point where they discount the value of anything that can't be evaluated by it.

In an article in this week's Advertising Age, Tim Calkins and Derek D. Rucker, from the Kellogg School of Management, argue that such ROI dependency leads to bad decision making. They point out that many important marketing activities are difficult to measure: Building the brand, improving customer satisfaction, building employee morale, for example. The danger is that these programs will be downgraded in importance vs. more measurable activities such as price promotions only because their benefits can't be so readily tracked.

It's a battle I fought many times as a brand manager. The dice were always loaded against advertising and in favor of coupons etc. "Run the numbers," the finance group would say and, unless we could sneak in some completely unsubstantiated assumptions about brand value, sure enough the coupons won out. Short term focus vs. long term gains.

Calkins and Rucker suggest, convincingly, that Starbucks is a clear example of ROI dependency. Many of its recent initiatives: machine automation, breakfast sandwiches etc have boosted short term profits and increased same store sales but have finally led to a serious dilution of Starbuck's brand equity.

They are not arguing, and nor would I, that marketing should be a "black box" with a spending free for all. But rather that executives must consider a wider variety of measures to figure out the best marketing approach. As they say: "Focusing solely on ROI is dangerous and naive."

Earlier "Death by Metric " posts:
1) Discounted cash flow
2) The P&L
3) Same store sales

Links:
1) Don't Overemphasize ROI as Single Measure of Success: Advertising Age (registration required)

2 comments:

BIG said...

Good post Martin, I get this from my clients ALL the time. Sometimes building brand image is worth every penny but alas it can't be measured.

Sophisticated marketing professionals do understand this but they're hard to come by.

social nomics said...

Spot on with this article, I really think this website needs more attention. I'll probably be back to read more, thanks for the info. short term ROI

 
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