The Problems with Current Return on Marketing Investment Models

In ascertaining the effectiveness of their marketing and business development initiatives, service businesses typically do not get useable information. Part of the reason for this lies in some faulty premises they make in interpreting return-on-investment (ROI) data. But, part of the reason also lies with some of the current methodologies used to measure return-on-marketing investment.

Such a metric, at its most basic level is usually defined along the lines of: “the measure of the profit earned from an investment.” For marketing investments/expenses, the calculation for this is represented by:

(Gross Profit – Marketing Investment) / Marketing Investment

Basic ROI models don’t go very much beyond this and certainly in evaluating the success or failure of individual initiatives, many marketing decision makers do not engage in analyses beyond what such a calculation offers.

But for some service industries, such an approach does not do justice to the “word-of-mouth” element that is so critical in building a business or a professional practice. While we can easily determine how much revenue a specific client or customer has brought in over a particular period of time, we have a harder time determining:

  • The additional revenue that client brought in via referrals
  • How the referring customer was initially obtained
  • The value of resources (including time) that have been allocated towards obtaining that client

A second problem inherent with most marketing ROI models is that the value of non-direct (or soft) marketing elements is usually not measured at all. Activities such as image advertising, social media, and pubic relations are typically measured through interim metrics (awareness figures, number of articles placed, click-through rates, etc.). Other marketing initiatives (e.g., a fbrochure or web site) are usually not measured at all.

To illustrate this point in practical terms, consider the question of exactly how much of an investment should a service business make in developing a new web site. It is a difficult value to ascertain and is usually answered with guesswork based upon what seems “reasonable” and an “I know what I like when I see it” approach.

Third, many ROI models rely on a whole assortment of assumptions — developing hurdle rates, conversion rates, repeat purchase rates – all of which most service businesses would find difficult to obtain, let alone take the time to calculate and examine. While such models may be effective for products-oriented businesses, they are less so for businesses where the volume of customers is relatively few and where the possibility of one single client skewing results (and thus influencing future decisions) is relatively great.