How Do You Spell ROI?
Return on Investment: Everybody's talking about ROI, but not everyone agrees on what it is.
Given the various ways that I've heard marketers bandy about the term ROI, I wonder how many of them really understand the concept, and how many just use the term as a buzzword.
There's certainly a disconnect between the way many marketers use of the term and the traditional definition embraced by CEOs and CFOs.
A study by The Fournaise Group in 2012 revealed that:
- 75 percent of CEOs think marketers misunderstand (and misuse) the "real business" definition of the words "Results," "ROI" and "Performance" and, therefore, do not adequately speak the language of their top management.
- 82 percent of B-to-C CEOs would like B-to-C ROI Marketers to focus on tracking, reporting and, very importantly, boosting four Key Marketing Performance Indicators: Sell-in, Sell-out, Market Share and Marketing ROI (defined as the correlation between marketing spending and the gross profit generated from it).
So CEOs clearly want marketers to get on board with the true definition of marketing ROI. You can calculate marketing ROI in two different ways:
1. Simple ROI:
Revenue attributed to Marketing Programs ÷ Marketing Costs
2. Incremental ROI:
(Revenue attributed to Marketing Programs - Marketing Costs) ÷ Marketing Costs
Either of these definitions is consistent with the classic direct marketing principles of Customer Lifetime Value (the "R") and Allowable Acquisition Cost (the "I").
Back in 2004, the Association of National Advertisers, in conjunction with Forrester Research, did a survey on the definition of ROI where respondents could select from a menu of meanings. The results showed that there was no definitive definition of ROI, but rather, that marketers attribute up to five different definitions of the term and many use it to refer to many (or any) marketing metrics.