Be Careful with ROI!
I love direct marketing! It’s one of the few marketing disciplines where we (think) we’ve got all the numbers necessary to measure success and predict the future. It is both art and science. As a “numbers business” we get to play with lots of data and measure most every aspect of performance. But as Darrell Huff pointed out in “How to Lie with Statistics,” we often become guilty of “statisticulating”—using information that misinforms to prove our point.
ROI can be a great tool for statisticulation. Few marketers do this intentionally. It is a more significant problem when we do it unintentionally. But it’s also a great tool for measuring success. Let’s examine some of the common problems with using ROI in direct marketing.
ROI means Return of Investment. It is similar to the measurement of stimulus/response in experimental design. That is, if I insert a stimulus into a process (investment), what will be the response (return) due only to that stimulus? This is where we can run into problems with ROI.
Defining R: What is the R in ROI? Seems simple, but what is “return”? Return has been defined in a number of different ways. By googling for “direct marketing ROI,” we found revenue, amount spent, amount donated, profit, contribution, and lifetime value as measures of “return.”
Not all “Rs” are created equal. If costs are highly variable, investing more to achieve greater return can lead to unexpected results. That is, when costs are mostly “fixed,” changing the amount of investment is more highly correlated with the change in return. When costs vary, a change in one cost may affect changes in other costs before return is measured. For instance if each direct marketing sale results in a loss, an investment to achieve greater number of sales (return) can lead to a greater loss. Of course a direct marketer’s expectations may be to lose money on the first order to get future returns on repeat order.
It is important to clearly understand the goal of return—be it profit, revenue, or donations—in order to know if you are appropriately achieving your goals. Remember to think in terms of an experiment: Can I change the stimulus and hold other factors constant to improve my results!
Defining I: Equally important is to define the “I”—Investment. If I spend (invest) a dollar in direct marketing, will I get more than the dollar back? The simplest (and perhaps best) approach to ROI is to count ALL costs and measure TOTAL return. Then, when an investment is made, the change in total cost is measured with the impact on total return.
Some make the mistake of looking at a specific cost and looking at the impact on return based solely upon that change in cost. For example, if I include a new mailing list that costs $1 more than before, I would ask if it creates greater than a dollar in return (to achieve a positive ROI). However, the new list could include hidden costs different than those of other lists. It may be that the specific list requires more extensive hygiene (such as NCOA)—and therefore costs—than previous lists. The costs associated with this should be included or the return on the investment in the new list would be misleading.
Most direct marketers do include total costs, but a vendor making their case for ROI may only show what makes their case for the sale.
Accept the Vendor’s ROI?
Vendors should present the business case for their product or service using ROI. But vendors often have a primary objective to make a sale. As noted above, it is possible that the vendor’s proposed ROI does not tell the whole story. One should ask the vendor not only to show what they thing the ROI can be, but also ask them to fully explain the reasoning behind it. And don’t take the information on face value. Marketers should analyze the information themselves and be convinced as to the validity of the calculation.
Vendors will rarely mislead intentionally. (I don’t think I’ve ever seen a situation where one tried to mislead a client with false information.) But remember that the vendor has an agenda to make a sale. He or she will want to present their case in the best light possible. In fairness to them and to you, double-check the calculations and logic behind them.
Set It and Forget It
Ron Popeil, one of the most prolific direct marketers, is known for the promoting his Showtime Rotisserie with the phrase, “Set it and Forget it!” But with ROI we cannot forget it! Once an ROI is “set,” it needs to have ongoing monitoring.
ROI will change over time. Many factors are uncontrolled in direct marketing—response rates, the economy, the weather, etc.—that can affect ROI. ROI should be an ongoing measure of the performance of direct marketing programs, particularly when one measures the entire investment and the total return. With the careful measurement of on-going ROI, a direct marketer can have greater confidence in the impact of investment changes in the process and the impact they have on improving return.
Think in terms of an experiment when considering the use of ROI. Something changes, and something occurs. It is critical to understand what elements are related to the change due to an investment, and what results are due to that investment.
Donald P. Hinman Ph. D. is executive vice president and senior principal at The Allant Group, Naperville, IL.
