Guest Post by Chris Peterson
A few weeks ago, I commented on Chris’s blog over at Results Count. I didn’t agree entirely with his position on a couple of items, and he didn’t agree entirely with me. However, as so often happens we agreed on more than we disagreed on.
One area that we were in violent agreement was a passion for helping our clients to improve their business. The upshot was a guest post by me over at Results Count and this post by Chris.
How do you make Sales & Marketing Execs sweat? Ask for ROI.
“C–level” Executives are typically measured and held accountable for bottom-line, P&L contribution margin. While this is a critical measure of corporate results for top executives, it does not provide the ability to analyze the ever growing “investments” directed toward growing topline revenue.
Sales and Marketing Execs are in the business of improving sales performance. The EVPs and their managers are not shy about asking for incremental resources to fund special projects, advertising, or promotions. It would seem logical that such initiatives would be measured on ROI – Return on Investment. Yet, Senior Managers and even Execs are intimidated when asked for ROI … why?
Fear of Accountability
It is surprising how many corporate cultures simply don’t hold managers accountable for producing a profit return on the millions they invest in ads, media, merchandising, and campaigns, etc. And, many Execs simply fear exposing themselves to the scrutiny of bottom-line results if not required. It is far easier and safer to measure activities, impressions and a host of other indices of what they “did”, versus quantifying incremental “results” achieved.
Myth that ROI can’t be measured
The formula for ROI is not rocket science:
ROI = (Gross margin (profit) on incremental sales (over baseline or comp groups)) / (The total cost of all marketing activities, media and events)
Every manager knows what they spent … if they don’t, they should be fired. ROI requires measuring incremental sales – the sales uplift over the baseline or comparison groups that did not receive the advertising, activity or event. The key is comparative measurement of “test” versus a “comp” group, or current performance versus a baseline. It can be done, but needs to be part of the objectives and design.
Lack of Data Myth
With today’s systems, it is possible to get individual sales by week, day, even by hour. With location level sales data, it is possible to set up comparison groups and controls. So it is not the lack of data, but the lack of commitment to employ a simple test vs. control methodology to determine if there are incremental sales and ROI relative to investments.
Burden of Breakeven
In consulting with clients on measuring results, we have found that there is an irrational “burden” and belief that you have to beat “breakeven” every time. Not all marketing investments will return more gross profit than the investment. But, the very act of on-going ROI measurement creates a comparative knowledge base of what works better where, and when.
There is an analysis paralysis mentality that measurement must account for every variable to get a precise ROI or P&L. Debating the minutia of parsing investment cost details, subsequently leads to the “perfect” excuse that ROI can’t be accurately measured. With this logic, we are back to square 1, and the fundamental reason why ROI isn’t measured – fear of accountability.
We specialize in helping companies analyze marketing, merchandising, training other investments designed to change the customer experience to profitably grow sales. In reviewing over 200 projects from the last two decades, only 17 managers originally set out to measure ROI. When they are shown that ROI can be measured, their response invariably falls into one of the five excuses detailed above.
Results Count … everything else is conversation
Regardless of the specific metric, there are five core principles which are essential for the behavior change required to produce and sustain measurable results:
- You can’t expect what you don’t inspect.
- What gets inspected can be managed.
- You won’t improve if you don’t keep score.
- What gets measured gets done.
- What pays off gets done first.
In today’s economy, the results that count must go beyond revenue growth. Expecting and inspecting ROI simultaneously focuses these five core principles on two critical dimensions: “R” – the Incremental gains on the top line, and the “I” – which comprises the multitude of investments directed at customers and converting sales. The best in class companies also measure “C” – customer loyalty factors critical to sustaining relationships that produce results that count on the bottom line!
What’s your experience with ROI … why do you think that Senior Managers fear or avoid ROI?
Chris Petersen, Ph.D.
Chris Petersen (@ChrisHPetersen), is a founding partner of IMS, a consultancy specializing in analytics and measurement of Results that Count. For the past 25 years, Dr. Petersen has lead IMS Retail University which has over 13,000 graduates from 34 countries.