[photopress:trackrecordsm.jpg,full,alignright]A few of my friends IM’d, emailed and called me yesterday to talk about the post I wrote on ROI not being a good indicator for how well marketing is doing. That prompted me to elaborate on the subject a bit in this post.
First, lets look at the statement that Marketing is not a set of simple linear processes that can easily be measured – but rather a complex multi-variable and non-linear process.
Assume you have a new product version, for which you develop a special upgrade price and an extra sales incentive. Lets further assume that you have done well and therefore enjoy some positive word of mouth in the marketplace. You now decide to launch this product upgrade with a massive email campaign and by participating in a industry trade show. What does the ROI on the email campaign tell you about the efficacy of email marketing in this case?
The email campaign could bomb because you could have the wrong offer for that audience, or a sales incentive that competes with a better one which causes the channel to push an alternative product. You could have had a few of your products explode a few weeks before the whole campaign, resulting in negative word of mouth. Or you could get 30% of the good leads that both read the email and went to your show. How do you then determine ROI? And assuming that you can, what does it tell you?
NOTHING! You can not predict the behavior of the whole system by understanding the individual parts…there are too many variables in the whole system…the system will exhibit some emergent behavior, which cannot easily be measured with standard ROI metrics.
All of this leads to the next statement I made yesterday. Lets assume that you can find a solution to measure ROI which takes into account all the inter-dependencies and variables that rule your market at this particular point in time. What does it tell you about the future performance of marketing programs, incentives and promotional pricing schemes?
Because ROI is a trailing indicator, not a leading indicator…
So are there leading indicators that marketers could use? The best one I found so far is ROI, but not as in Return on Investment – but as in Return on Information, as defined by John Hagel. You measure ROI both from your company’s point of view as well as from the customer’s point of view. As John says: “From an organizer (company) perspective, the question becomes: How much effort and cost did I invest in acquiring information about individual participant and how much value have I been able to generate in return, both for the participant and for me? From a participant (customer) perspective, the key question is: How much information about myself and my needs have I provided, how much effort did it require and, relative to both of these, how much value have I received in return from the information provided?” You could extend this concept to also measure the amount of information you need to provide a prospective buyer for him/her to make a buying decision.
Looking at it this way is definitely a more holistic systems approach to measuring success. And unlike the traditional ROI, it could help you predict future behavior. If the Return on Information from a customer’s point of view is positive, chances are that all your messages will be amplified by positive word of mouth…
So how could measuring marketing ROI be harmful to your marketing department? As I said yesterday, by insisting on measurability, companies will force marketing execs to break marketing into a collection of simple linear processes, which is not how marketing really works. By doing so you will miss all the opportunities at the intersections, and kill programs that should be leveraged in certain circumstances at at certain times. And for as long as you will have an ROI-driven marketing department, the credibility of your marketing department will continue to diminish, and the frustration of the executive team with the CMO will continue to increase.