Clint Eastwood’s iconic movie character Detective "Dirty Harry" Callahan is remembered for his showdown speech:
“Uh uh. I know what you're thinking. 'Did he fire six shots or only five?' Well to tell you the truth, in all this excitement, I kinda lost track myself. But being this is a .44 Magnum, the most powerful handgun in the world, and would blow your head clean off, you've gotta ask yourself one question: 'Do I feel lucky?' Well, do ya, punk?“
No one wants to be in the prone criminal’s position – injured, a weapon within reach, but staring down the barrel of Dirty Harry’s gun, wondering if Detective Callahan is bluffing or if he has a round that will “blow your head clean off.”
Of course, everyone wants to be in Dirty Harry’s position – holding the gun and knowing how many shots he has in his hand-cannon.
Sometimes life imitates art, and it does so most definitely when you’re a marketer. An unfortunate reality today for many CMOs is that they are in the position of the punk. They couldn’t keep track of all the activity and marketing ROIs and now they are forced to make a life or death decision (for their brands or their careers) based on imperfect information. They are forced to ask themselves that one question, “Do I feel lucky?”
What Is ROI?
In the case of marketers, keeping track of shots fired can be addressed with marketing measurement and specifically ROI (return on investment). The next question you should ask yourself is what ROI? While ROI is a term that is used often by marketers for measurement, it has many different definitions and business implications. It is often the source of much debate and contention.
While not as simple as counting the rounds released from a .44 Magnum, there are some key areas to keep in mind to ensure your ROI measurement and metric provide you with the most actionable insight for your business.
Understand the math.
ROIs are a calculation of incremental benefit divided by the cost or investment. It is critical to understand both sides of the ROI equation. There is often a great focus on the incremental benefit and how it is derived via many different analytic techniques. Unfortunately, there is a lack of understanding with regards to the cost side of the equation. Costs may be fully loaded (incorporating fixed and variable spend), or working costs (variable spend) and both are useful to consider in spending allocation.
Get Finance involved.
Finance Department involvement ensures the calculations and assumptions are consistent with the business P&L. The best metrics and KPIs are aligned to your organizational goals and how your organization currently views the business. If there is a strong focus on topline revenue, then Revenue ROI is a good metric. If there is a strong focus on bottom line profit, then Profit ROI will provide a better key metric. Match the marketing ROI calculation to the factor most valued in your organization.
Strive for holistic business assessment for comparable ROIs.
Introducing an organization to ROIs can be a very powerful way to drive accountability and move towards a culture of continuous improvement. However, it can be counterproductive if the ROIs are not comparable across businesses, and channels. I once had a CEO tell me that he received ROIs from each of his departments, and if he were to add them up, his business would appear to be double the size than it actually is. It is ideal to provide a consistent metric where you have conducted a holistic business assessment. Where it isn’t possible, a good option is to provide a different KPI metric (e.g. response, index vs year ago) to ensure the business does not make direct comparisons.
Look towards improvement, and manage expectations.
ROIs should be used to understand business performance versus a benchmark (either an industry benchmark or historical ROI performance). It is important that your organization does not get discouraged if all of your investments do not pay out. This is rarely the case - if all expenditures generate at least as much profit as the expenditure ($1.00 profit ROI) – any brand could grow to infinite size by spending an infinite amount of money, and that is just not a realistic expectation.
Complement ROI with other considerations.
ROIs are a great efficiency metric, and even more powerful when complemented with other KPIs and considerations. Many brands have built equity over time and now they drive growth that is profit deleterious in the short term. This spending however, has other benefits such as competitive loss avoidance, maintaining relationships with customers or retailers, and longer term equity impacts. Complement your ROI understanding with considerations for the longer term effects of marketing in building equity, loyalty, and pricing power.
Drive towards action and validate.
Utilize your ROIs to support more informed decision-making, and to assess the risk and opportunities associated with future marketing plans. ROIs are most impactful when used in combination with other research and business assumptions to conduct simulations and what-if scenarios. Ensure you incorporate diminished returns (e.g. lower ROIs at higher spending), scalability (e.g. media inventory), and potential cost inflation within your scenario planning. Conduct post-scenario validations to drive confidence in leveraging ROI for planning. Validations also provide an opportunity for the business to learn from and fine-tune future planning assumptions.
As a marketer, if you can align on the above factors, then you will have a strong handle on the returns from your marketing investments. You can make decisions from a position of strength – from the Dirty Harry side of the .44 Magnum.
The Dirty Harry character is certainly remembered for his speeches and one-liners. However, a big part of the appeal of the Dirty Harry character is his ability to buck the system and get positive results in a world where the good guys are handicapped by the unreasonable rules, clueless politicians, and social decay. Likewise, everyone wants to be the marketer who breaks down walls, fights bureaucracy, and gets positive results. Getting a handle on what ROI is the first step to being the Dirty Harry of your organization.