Return on Investment – ROI – and Why It’s Important… Or, Is It? Usage in Marketing, Sales, Social Media, R&D, Training…

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Not only are we able to help our customers navigate the complexity of the marketplace. We are able to show a 20%  to 50%  ROI ~Ellen Siminoff

Return on Investment (ROI) analysis is one of several commonly used approaches for evaluating the financial consequences of business investments, decisions, or actions. ROI analysis compares the magnitude and timing of investment gains directly with the magnitude and timing of investment costs. A high ROI means that investment gains compare favorably to investment costs.  In the last few decades, ROI has become a central financial metric for asset purchase decisions (e.g., computers, factory machines, service vehicles…), approval and funding decisions for projects and programs of all kinds (e.g.,  marketing, recruiting, training…), and more traditional investment decisions (e.g., management of stock portfolios, use of venture capital…).

In the article “Ten Myths About ROI” by Jack and Patti Phillips write: Originally, the concept of ROI was used in the context of showing value from investing in capital expenditures, such as buildings, equipment, and companies. In the past two decades, it has been used in the context of showing return on investing in a variety of non-capital expenditures like human resources, technology, quality, and marketing. But the term ROI is entered into the business lexicon on a routine basis. What’s the ROI on that? is a common question. ‘Can you show me the ROI?’ is often a request from executives. ‘This will deliver a very high ROI’ or ‘You can expect a very high ROI with our solution’ are commonly heard from sales professionals. Most of these requests are brought into play without understanding the true meaning of ROI. In reality, the return on investment is a financial term. It shows, in a single metric, the potential (or actual) contribution of different projects, services, programs, and events…

In the article “Return on Investment: What is ROI analysis?” writes: One serious problem with using ROI as the sole basis for decision-making, is that ROI by itself says nothing about the likelihood that expected returns and costs will appear as predicted. ROI by itself says nothing about the risk of an investment. ROI simply shows how returns compare to costs, assuming the action or investment brings the anticipated result. For that reason, a good business case or a good investment analysis will also measure the probabilities of different ROI outcomes, and wise decision makers will consider both the ROI magnitude and the risks that go with it. In complex business settings, however, it’s not always easy to match specific returns (e.g., increased profits) with the specific costs that bring them (e.g., the costs of a marketing program), and this makes ROI less trustworthy as a guide for decision support. The standard advice for ROI is usually explained as: ‘Other things being equal, the investment with the higher ROI is the better business decision.’  However, important business decisions are rarely made on the basis of one financial metric, moreover, the condition other things being equal almost never applies. Therefore, when reviewing ROI figures, or when asked to produce one, it is a good idea to be sure that everyone involved: ‘Defines the ROI in the same way, and understands the limits of the concept when used to support business decisions’.

In the blog “The Internal Importance of ROI” by Greg Ness writes: To some, return on investment (ROI) may appear to have reached marketing buzzword status. However, despite its widespread use in the current business lexicon, its importance cannot be understated — especially to marketing executives. While understanding and being able to measure ROI is of vital importance to external marketing efforts, it’s just as important for internal communication and credibility. With all the financial turmoil that many companies are facing, it’s very important that marketing is represented as a lifeblood investment rather than a costly excursion.  Without hard numbers to support requested marketing budgets, top management and boards of directors are in no position to approve marketing outlays in today’s economic quagmire. Faced with declining sales, some companies cut marketing by a certain percentage across the board. That may be an easy way to cut budgets, but it is seldom the smart way. If, and that is a ‘big if’, you absolutely need to cut your marketing, concentrate on cutting out what isn’t working for you and preserve what is working well for the organization. The only way to know is by having an ROI analysis in hand.  The thought of CMOs or marketing executives trying to navigate their way to success without having numbers (i.e., ROI) that support their efforts could be a challenge.

In the article “Why ROI Doesn’t Work” by Glenn Gow writes: Many technology companies, especially those that offer complex or expensive solutions, have developed ROI tools for their sales organizations. The goal is to provide a way to offer prospects a factual, economic basis for making a purchase decision. A truly useful ROI tool/sales approach will be flexible enough to guide the buyer and sales person to constructing a customized business case and in the process will help to define the playing field for the evaluation itself. The right tool, presented in the right way, gives the sales rep the power to help the prospect make his economic justification as to the value of the solution. Prospective buyers need help in articulating their own ROI, and in constructing a business case. By providing this pivotal business-case-construction assistance, the sales professional is positioned for greater visibility into the deal, providing him with key information that can move the dialogue forward and accelerate the time-to-close. The sales organization needs skills to assist prospects in developing their own approach to whatever economic justification process is best for the prospect and your solution. An ROI program designed to build trust and face-time opportunities will accelerate the sales cycle only if it is enthusiastically adopted, and proper support mechanisms are in place.

In the blog “Your ROI: The Most Important Number for Your Business” by Richard Seppala writes:  The bottom line success or failure of a business boils down to the numbers: Profit, revenue, labor cost, profit margin– each of these calculations (and others) are powerful indicators of the health of your business. The marketing ROI is another important number for the business. Knowing the ROI for each of your marketing investments tells exactly how successful each initiative is per dollar spent. And that enables you to stop spending money on campaigns that don’t produce results. It enables you to focus all of your marketing dollars on the initiatives that are the most profitable. Once you identify tactics with a strong positive ROI, you can invest money confidently; knowing that you’ll recoup your investment and more. Knowing your marketing ROI allows you to pick up more business efficiently. And that, in turn, allows the improvement of most other financial numbers dramatically.

In the article “Marketers Use Varying ROI for Social Media” by KingFish Media writes: The report ‘Social Media Usage, Attitudes and Measurability’ indicates that marketers are directly measuring the number of people responding as the ROI of their social media campaigns. For example: Almost all (93%) measure the number of visitors/page views, while 85% measure the number of fans/ followers generated. Another 79% measure the traffic generated to the corporate site from social media. Other popular metrics directly measuring people include leads generated (72%) and new customer conversion (58%). Some metrics measure the actions people take, such as number of comments posted (71%) and shared links (55%). In their use of qualitative metrics, marketers are most apt to measure the impact social media campaigns have on customer relationships. Eighty-four percent measure increased dialogues with prospects and customers, while 68% measure how much existing customer relationships were strengthened. In addition, 57% measure customer retention and 43% track the ratio of negative to positive relationships with prospects and customers. One popular qualitative metric, corporate/brand reputation (68%), does not directly measure some aspect of customer relationships. Surprisingly, 43% of marketers say they have not yet measured the ROI of their social media efforts. Another 34% say social media efforts have met expectations, and 13% say they have exceeded expectations. In a positive sign for the effectiveness of social media as a marketing tool, only 8% of marketers say social media efforts performed worse than expected, with 2% considering them far below expectations. In what may be reflective of the relative newness of social media as a marketing tool, only 29% of marketers say they will have to show positive ROI to continue their social media programs. Forty-three percent will track ROI but not set requirements, while 21% will not track ROI and 6% don’t know…

In the blog “Experts: Old-fashioned ROI is Best” by Barney Beal writes: The most dangerous pitfalls in attempting to measure ROI are people who rely on an average ROI or rely on the ROI from another company. A sales rep may be selling an application and says the average ROI is 200% or the person down the street has a 300% ROI. There’s no such thing as an average ROI. You can’t compare your ROI to someone else’s. ROI is just an indicator of how big a step you take.  Another important problem is that many
companies rely on benchmark data. Benchmark is good guidance data, but you should never use benchmark data to drive your calculation. Your calculation is just for you and your company. If you use benchmark data, you’re going to generate an average ROI based on average companies and an average benchmark, which doesn’t tell you anything about what you’re going to get. Finally, never trust a sales person to do an ROI assessment for you. You might as well trust a car dealer to write the check. It’s like handing them a checkbook and saying, ‘You figure out what I can spend on the car.’

In business, it is often said ‘it takes money to make money’. The ROI is a profitability ratio that helps measure the performance of the application of money. ROI measures the link between profits and the investment required to generate profits. ROI is frequently used by management to measure performance against internal goals, competitors, or a specific industry. Management also utilizes ROI to determine where to allocate future resources based on previous investment’s profitability, which allows the ROIs from different amounts of revenue to be compared. For example, an expensive piece of machinery may generate more revenue than a lower cost investment, but that lower cost investment may have a better ROI. ROI allows management to see past revenues, and view the effects of investment expenses on return. Although there are  many issues with the ROI calculation, it’s a good method of measuring and comparing the earning power of investments. The ROI is a versatile and simple measurement for deciding where to allocate capital funds and that makes it a very useful management decision-making tool…

Most companies are looking for a 12-month return on investment, or payback in the same fiscal year. It may be that the price point is too high. ~Richard Barrett

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