ROI, otherwise known as Return of Investment, isn’t just any benchmark. In the eyes of many, it is THE benchmark. It’s the standard measure of success that many use to evaluate the success and failure of their marketing ventures and expenditure. But while ROI is no doubt a useful metric, it’s not without its flaws.
The Problem With Return of Investment
It’s true. The better the returns, the easier it is to defend how much was spent to bring in such returns. More importantly, it makes justifying any and all future spending more objective. However, the problem with using ROI is that it fails to take into account impact.
A good example of this is branding.
Brands are arguably the most valuable asset any company can have. Yet, at the same time, determining the exact value of a particular brand is far from easy. In fact, one could say that it’s impossible. Although there are attempts to determine and rank the value of brands, most of the calculations used are based upon one assumption after another, which makes it difficult to assess just how much of an impact a 30-second ad can have on a brand.
Because it’s impossible to determine the brand’s value, then using ROI to make decisions that directly affect it just doesn’t seem right now, doesn’t it? Neither does ignoring the brand nor making assumptions and predictions.
Branding isn’t the only area where ROI’s flaws as an evaluation tool are shown. Other areas include employee loyalty and morale, customer satisfaction, and brand loyalty.
Keep in mind that these are all equally important to the success of the company, but they are also all intangible in the sense that it’s near-impossible to quantify them in a way that they can be used to calculate the ROI.
Where Does ROI Succeed? Why Is It Still Used?
Of course, if ROI isn’t without its flaws, it’s also with its own merits. There are plenty of reasons that companies still use ROI, but it all boils down to its simplicity and accuracy.
The simplest way to determine the ROI of a particular investment is by taking the number of the value gained and dividing it by the initial investment. For example, if you invested $1,000 in a side business for two years and it grew to $2,500 in that period of time, then you can report an ROI of 250 percent.
Keep in mind though that this is not the most accurate representation of ROI.
Instead, the discount ROI method takes the basic principle but calculates the present value of the investment first and then discounting it. Although this adds a layer of complexity to the overall computation by taking into account the changes in the value of the currency or inflation and leads to a considerably lower ROI, the data derived from it is also more realistic.
Even then, calculating ROI is so simple that it doesn’t take a financial analyst to understand just how much you’re getting from your investment.
Thus, by using something that’s both simple and accurate, ROI becomes a favorable measurement tool that helps determine the success and failure of any investment or campaign.
The “R” in ROI has always stood for Return, but maybe it’s time that it stood for something else.
R Shouldn’t Always Stand for Return
The term “results” seems like a more apt word to use. This is because using the word “return” implies an immediate financial gain from any investment. Meanwhile, by using the word “result”, it makes it easier to quantify what happened from a particular investment.
Case in point, having more customers on your email list or paying to have paid ads placed on high-traffic websites doesn’t necessarily lead to financial growth. Or, at the very least, not immediately.
Using traditional ROI metrics, such an investment can be considered a failure. But, if you look at it from a results-oriented standpoint, such investments have their own advantages. Like, for example, having a bigger email list increases the company’s reach, opening the possibilities of reaching out to a much wider audience. Meanwhile, at the same time, paying for ads to increase awareness of your company and what your company is all about may not necessarily lead to higher profit immediately, but it can and will make audiences aware of who you are, especially when they need you.
Such investments become more fruitful if they’re looked at from a long-term perspective, which ROI often fails to take into consideration.
With that said, what “success” means isn’t always the same. Whether you agree with our sentiment of changing what the letter “R” means or not matters not as much as being fluid with how you define the success of your investment.
It’s imperative that, whatever your company does, you decide what success looks like from the onset to make it easier to accomplish what a campaign is supposed to achieve.
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