Ultimately, business success is judged on the ability to drive performance and create an impact that meaningfully moves sales, profits and whatever other measures one uses. Demonstrating improvement or success has, too often, become more about corporate politics than about achieving goals and objectives.
ROI - return on investment - was originally devised to align financial and operational performance. But a funny thing happened on the way to the bonus pool. The financialization of the broader economy distorted the relative importance of the variables in use.
The first evidence came in the 90s when the shareholder value movement gained primacy. The notion governing that theory was that the interests of the 'owners' of the business should come first. This spawned 'pay for performance' which was supposed to have forced managers to have 'skin in the game.' But as many observers have noted, measurements begin to lose value as soon as they are announced because those affected by them begin to game them to their advantage. The interests of a couple of other crucial stakeholders, customers (oh yeah, them...) and employees, were devalued as senior management compensation took off.
This is what led to the stock option craze, the constant re-setting of triggers, the increases in CEO pay and many other factors that brought us to the present day. Financial results are regarded with a jaundiced eye leading many sophisticated players like hedge funds and private equity firms develop their own metrics. The result has been that investors have fled the capital markets, sensing that it is no longer safe for investors who are not 'connected.'
ROI was seen as the arbiter of success. The problem is that it, too, created distortions driven by the needs of those whose connection with the customer was sometimes tenuous. At its most basic, ROI can most effectively be managed upward by manipulating the denominator, usually downward. And what is the denominator? As millions of employees have learned to their distress, quite frequently it is them.
The challenge this creates is that the broader interests of the corporation become secondary. This is, ultimately, contrary to the principles of evolution and survival of the entity in question, which means that whichever species adopts it will probably not last long. Recent trends concerning the 'too big to fail' banks bear this out. But even CEOs, who appeared to have benefited most from the ROI obsession have seen their average tenure cut in half over the past decade.
ROI is a useful measure when used in moderation rather than as a broad-scale deity to whom all must bow. It has its place, but so does having an impact on customer satisfaction, on market share, on growth, on new product development, on employee turnover and a host of other measures. This does, of course, assume that the stewards of the organization are less interested in individual enrichment than in a commitment to organizational longevity while prevailing against global competition. JL
Greg Satell comments in Digital Tonto:
Marketing used to be about two things: Creating a big idea and executing it as cheaply and efficiently as possible without sacrificing quality. We looked for large audiences and negotiated tough deals.
That’s evolved somewhat in recent years, as both agencies and clients recognized that too much emphasis was being put on outputs and not enough on outcomes
Just because you reach a lot of people doesn’t mean that you’ve driven the business forward.
The ROI movement sought to more closely align tactics with business goals. It has been largely successful. So successful, in fact, that most of the important problems have largely been solved. What remains involves computational resources and intergration. Therefore, we are now entering a post-ROI world of innovation, open brands and co-creation.
The Rise of Marketing ROI
The post-war economy was an era of mass media. There was a limited amount of TV stations and programming was geared to mass audiences. Advertising pioneers such as David Ogilvy and Leo Burnett developed powerful brand images that transformed the landscape of commerce. Great creative work combined with mass audiences evolved brands into consumer icons.
Then, in the 80’s and 90’s, cable and satellite technology revoltionized media and fragmented audiences. No longer could you be sure that your target consumer would see your message no matter how big the idea was. The central question became “where is our consumer.” Media buyers became masters of optimizing reach and frequency.
More recently, digital media created a host of new ways to target and re-target consumers. Google and Facebook showed that advertising was more than just reaching people with messages, but also driving sales and getting people to share brand messages. In order to manage all of the various data, a new industry of advertising technology has arisen.
The chart gives a rough approximation of the path an ad travels between the time a consumer clicks on a page to the time that an ad is displayed. It’s really quite amazing when you think about it. Where we used to think merely in terms of demographic targeting, now we have a host of targeting methodologies to choose from.
The result has been a lot more flexibility and better outcomes, optimized in real time.
Outcomes, Not Outputs
While all of the technology is impressive, ROI is about a whole lot more than metrics and KPI’s, it’s about moving the business forward. That requires more than delivering impressions and clicks, but understanding specific brand needs. A “one size fits all” approach is no longer considered efficient.
As I’ve written before, we have entered a post-promotional paradigm. Consequently, path-to-purchase models, which are basically expanded versions of the chart below, have come into widespread use and have played an important role in aligning marketing strategy with brand objectives.
Some brands are well known, but fail at the point of purchase. Others have strong sales, but consumers are unwilling to recommend them to their friends. Still others, have a devoted following, but suffer because most people don’t know about them. Those are very different problems which require vastly different solutions.
The combination of better technology along with a better understanding of brand objectives has proved to be a powerful combination. We are no longer treating all brands the same way and simply trying to reach as many people as possible, but are efficiently deploying resources to where they will have maximum impact.
However, for marketing communications professionals, ROI efforts are becoming a victim of their own success and we will increasingly have to go beyond ROI in order to produce superior results.
The Curious Case of Logistics
To understand the fate of ROI techniques, it’s instructive to look at another core business function: Logistics.
Wal-Mart, for example, has invested for decades in their logistics systems, with outstanding results. At the heart of these systems are algorithms designed around the age-old traveling salesman problem, one of the most difficult conundrums in mathematics. So difficult, in fact, that it has never been fully solved.
However, the perfect doesn’t need to be the enemy of the good and computer scientists have invented ingenious self organizing techniques such as genetic and swarm intelligence algorithms that can closely approximate a solution. The more processing power you use, the better your answer will be. You can essentially choose your level of efficiency.
Nowadays, a business get the benefit of the decades of investment in logistic algorithms by simply calling up UPS and many companies do.
A Question of Competency
Advertising technology is approaching a similar situation. Much of the work is now done by machine intelligence rather than by humans. Many of the biggest problems have largely been solved, it’s mostly a matter of processing power which, by the way, is getting cheaper and more plentiful all the time.
That’s not to say that there isn’t room for innovation. Natural language processing, for instance, has a lot of untapped potential and companies like Networked Insights and Open Amplify are beginning to harness it. Other areas, like Big Data, are developing quickly and attracting a ton of investment.
However, and this is a crucial point, none of these technologies are specific to the marketing services industry and, to be honest, the industry has very little competence in developing advanced techniques. That means that it’s going to be harder for practitioners to differentiate themselves based on them.
Competing on the basis of which third party providers you choose is no way to win.
Creating Efficiency and Creating Value
The ROI movement has been enormously successful and will continue to evolve and advance. However, it doesn’t take much imagination to see that in the future we will see more and more computational power chasing fewer and fewer efficiencies. What’s required is a change in emphasis from creating efficiency to creating value.
Let’s assume it took Edison 1000 tries to invent the lightbulb, how would we calculate the ROI of the first 999? Does it matter? On what basis would a corporation evaluate launching the next Pinterest or Instagram? In much the same way, calculating ROI, as important as it is, does not create great brands, big ideas do.
And that’s where things really get exciting. Digital technology, after all, does a whole lot more than calculate things. It allows us to dream, simulate and experiment. We can choose our scale, evaluate in real time and run with what works. We can open up our brands and co-create with consumers and partners.
The future of marketing services is to become effective API’s for open brands. In the post-ROI world, the only limit is that of our imaginations.