|
This edition of TMAI Premium is free for Standard Edition subscribers.
In Premium-land, we've rushed to the end of the year activating high-impact ideas. We learned the Rules for Storytelling Revolutionaries - realizing that as much as data is important, it is often the story that drives change. With Creative accounting for as much as 70% of the campaign impact, I'd shared a modern Creative Strategy for Brand and Performance that takes advantage of AI. Finally, the reason Marketing is low-impact could come down to $$$ you are not accounting for - I'd shared how to unhide those costs. Sign up for TMAI Premium today to BOOST your career trajectory in 2026. No risk: The annual subscription comes with a money-back guarantee. | | TMAI #438: Will the Real Slim ROI Please Stand Up? -P1
| There's a scary Giant hiding in your closet. It imposes hidden costs that, when accounted for, transform your claim that advertising is adding business profits. Short-term, long-term. The Giant changes your omg! to OMG? There's an incredible return from investing time and love in identifying your Giant costs. Ex: Identifying non-working media costs, by calculating them for the core and sub components. There is only one other thing more important in Advertising (incrementality). [Premium Subscribers: If you can’t locate TMAI #437: Compute Non-Working Media Costs and TMAI #411: Proving Marketing’s Incrementality, just hit reply.] This got me thinking about how frequently we throw around the key performance indicator (KPI), Return on Investment (ROI) - without being careful how they are computed or transparent about what they include or exclude.We simply claim: Our Performance Agency is delivering an ROI of 4! The claim’s implication:For every $1 our Agency spends on Ads, they are delivering $4 back. HURRAY!!
So today... Let’s interrogate that 4. What is it? Can it be trusted to reward your Agency?A question to answer by the end: Does your Agency impact survive calculating ROI 4? [Note: Premium Subscribers: It will be immensely helpful to review perhaps my best newsletter of the year: TMAI #435: Methodologies Trump Metrics! Crucial to this newsletter: We will subtly leverage the intrinsic interactions between those two.] | With the Real ROI Please Stand Up?
So, what's ROI?The most common computation: ROI = [(Revenue – Media Costs)/(Media Costs)]
Media Costs are typically the Dollars/Renminbi you paid to run ads – on Facebook, Magazines, CTV, Radio, Bing. Sometimes referred to as Advertising Costs. Revenue is the traceable sum of $$$ earned from running the aforementioned ads. ROI is often expressed at a campaign level – though you can obviously decompose it by an individual ad, a channel, a group of tactics, and on and on. [This is when the Multi-touch Attribution methodology becomes super important - see TMAI #434.] I was reviewing a Client's QBR for a recent Campaign and sure enough they’d computed ROI: |
|
[Privacy Note: Numbers are real, the visualization is mine. Any mistakes you catch are mine.] ROI = 4!! [Note: I’m not going to cover the commonly bandied about ROAS – Return on Ad Spend. While a close cousin of ROI, I consider ROAS to be emotionally sketchy.] The Agency did not know the Campaign’s overall budget, not unusual as Agencies rarely do (though you should share with them). I’ve added that number to the table above. An ROI of 4 looks incredible, no? I offer that the 4 is unreal. It meets the classic definition of fake news. To sell the shoes / car parts / laptops / eye glasses / bluetooth adapters, you had to design them, manufacture them, ship them, store them, and wait for the order to come. Of all those costs, at the very minimum, you cannot ignore the cost to manufacture them. You sell a pair of eyeglasses for $50, you need to account for the $35 Cost to manufacture them. $35 is known as Cost of Goods Sold (COGS). Hence, this is a more real news formula of ROI:ROI 2 = [(Revenue – COGS – Media Costs)/(Media Costs)]
I call ROI 2: “Gross Profit ROI.” For the client above, this is a more real ROI the Agency delivered: |
|
For this company, the COGS was 70% of the sale price (expressed as Gross Margin above). After counting that, the amount the company made was $0.9 million, and not $3.2 million. The new, more real, ROI driven by advertising is 0.5. While heartbreaking, please learn to embrace the 0.5 – or you will never know how to be better. Wait, wait, there’s more. Remember, the total budget spent by the Marketing team was $1 million. It is not the $0.6 million being used in both the formulas above. The delta, $0.4 million, were non-working media costs. [See TMAI #437 for how.] IMORTANT: Your Agency spent $0.6 mil, their calculation is right for what they know. You spent $1 mil, it is your job to account for this money. You must account for the Total Campaign Spend, by using this formula to compute ROI: ROI 3 = [(Revenue – Non-working Costs – COGS – Campaign Budget)/(Campaign Budget)]
This helps us land even closer to the real ROI that your team (not Agency) delivered to the company: |
|
The Net Profit ROI 3? Minus 0.4. Your advertising campaign lost money. A shocking realization when you reported 4 to your CMO. No? We are not done. There's one more thing to get to the realest ROI from advertising.What would have happened if you did not execute this campaign? Would you have lost the entire $3.2 million in Revenue, if you had not spent the $1 million on advertising? Incrementality. Incrementality! We who are active practitioners of the art and science of incrementality know that you would have made a bunch of the $3.2 million even if you did not execute the campaign. I know, I know, it hurts our feelings as Marketers, but sadly, it is reality. Nearly all the sales that come into your company have nothing to do with Marketing! Let’s do one more computation of ROI, this time accounting for incrementality. In this case, the Agency did not practice incrementality for this Client, hence, for today, I’m going to assume it is a super high 30%. What does that number mean? 70% of the Claimed Sales by this campaign, would have occurred any way (store location, product features, seasonality, innovation, reviews on Amazon, whatever else). Here’s the final, closest to real, formula for ROI: ROI 4 = [(iRevenue – iNon-working Costs – iCOGS – Campaign Budget)/(Campaign Budget)] That yields the following Incremental Net Profit ROI (4) results: |
|
We really lost money.
The Campaign’s incremental Net Profit ROI (iROI) is -1.1.
A very different picture than the 4 the Agency presented at the start with ROI 1.
What do you and your Agency compute today? ROI 3 at least? Perhaps, ROI 4?
How much can your CFO really trust your claimed Marketing impact? | Next Week: Rise Like a Phoenix!Our ROI lays burnt in a pile of ashes. So... What do we do to turn things around for our advertising campaign?Next week's Premium edition lays out four approaches you can take to double (!) ROI 1, and move the impossibly difficult ROI 4 to a magnificent 2.2. You'll yell OMG!If you are not a Premium Subscriber, click here to earn the love of your CFO. | Bottom line.Marketing tends to be the first budget to be cut in tough times.Two reasons:1. No one at the top of the company quite believes any claim the CMO offers re impact of Marketing (see above). 2. Marketing competes with Engineering, Retail Stores, Customer Service, HR, Factories, Finance for budget - the short-term ROI from all of them is easier to see (and believe). This is our (Marketing's) problem to understand, and fix.ROI 3 is the minimum standard that'll survive Board or CFO scrutiny.ROI 4 will ensure Marketing is among the last budgets to be cut.Carpe diem.-Avinash.Note for Eagle-eyed TMAI Readers: The ROI computations above span a four to six month impact horizon. For brand marketing campaigns, the impact horizon, will stretch beyond six months. For these types of campaigns, we compute short-term ROI using different KPIs (#PL, CPIL) and different methodologies (true test-control surveys, not pre-post). We measure long-term ROI 4 with the same KPIs (incremental Profit), but leverage longer impact horizon measurement methodologies (like advanced attribution modeling, ML-based mix models, and CausalAI) Please refer to the dozen TMAIs on sophisticated brand analytics. | Committed to investing in your professional growth? Upgrade to TMAI Premium here - it is published 50x / year. | |
|
|
|
|