While it pains me to devote even more coverage to the state of the economy, it is an unarguable fact that it has impacted the way companies have and are continuing to do business over the last 18 months and certainly into the foreseeable future.
Ask any marketer to sum up their profession and undoubtedly the acronym ROI will make an appearance somewhere. The marketing director’s microscope has been fine-tuned to focus on payback of activity and return on investment tends to be the most well-known and most favoured metric, not least because this is something that resonates well in the boardroom.
The issue with the traditional revenue/assets formula is it can be very ambiguous – what income and what assets? As a result chief financial officers typically now couple ROI with residual income analysis to communicate returns to senior management. The theory being that the two figures complement each other and enable more informed decisions.
Marketers (both client side and agency side) should adopt a similar approach, particularly in order to give them more ammunition to protect their budgets in this difficult financial climate.
With more informed decisions being the name of the game, ROI as a standalone doesn’t deliver as it has some hefty flaws; the largest being that more often than not it is based on an immeasurable assumption.
There are several reasons for this, including lack of data about past marketing programmes, uncertainty about future programmes and lack of clarity about how marketing campaigns across various channels work together to affect actual customer behaviour, brand awareness and loyalty. And these days, the channel impacts too; you only have to look at social media and the ripple effect of it to see that it is a difficult medium to measure.
Furthermore, it can take years for strategic marketing plans to be fully implemented and have a significant effect on revenue. However, marketing programmes are expected to be measured and reported in the current period. This is the classic short-term versus the long-term view. It therefore makes sense to consider a metric that can measure the value of marketing spend in real-time, which can be presented alongside ROI.
ROC (return on customer) is a candidate for an alternative measuring method. If ROI gives indications of profitability, ROC can provide a more tangible, immediate, customer centric measure. At the basis of this calculation is customer equity – the overall lifetime value of a firm’s current and future customers. From this, ROC can be calculated as the sum of a company’s current-period profit from its customers, plus any changes in customer equity, divided by the total customer equity at the beginning of the period.
There will always be debate as to what metrics and ratios to use, but typically these are based around which is best. Instead of wasting precious time and brainpower considering the finer details, marketers need to step up and proactively offer more than before.
With CFOs now using complementary measures, there is now a real opportunity for marketers to show the value of their work through multi-layered evaluation criteria. It is no longer about ROI being good and questioning whether ROC is better, but using the strengths of each to communicate and assess success.
Simon Steel is insight and digital director at Eclipse Marketing
