Marketing ROI: The Path to Campaign, Customer, and Corporate Profitability

By Jim Lenskold
Published by McGraw-Hill

 

Your most recent project has just completed its first phase, but is running over budget. You expect Phase 2 to come in on target, but the incremental profit expected might be lower than originally expected. Should you continue or kill the project to cut your losses?

According to author James Lenskold, you need to focus only on the total ROI expected in Phase 2, ignoring the costs sunk into the project to date. The decision to continue or quit is only relevant with respect to actions yet to be taken and returns still expected. He calls this approach to marketing ROI forecasting the "point-of-decision." Using this method, if the expected incremental return from the total project minus the costs of Phase 2 is still above the corporate ROI target level, the project should proceed, regardless of earlier overruns.

Lenskold, a former AT&T marketing executive, does a nice job of laying out the foundations of Marketing ROI in a pragmatic, logical way. Starting with the basics of ROI formula construction, he walks through both the logic and math with clear, step-by-step examples that guide even the most financially phobic marketer through the process of campaign or initiative evaluation.

But the book's value isn't just limited to novices. Lenskold builds on the basics to introduce increasingly complex scenarios reflecting real world challenges. In addition to point-of- decision methodology, he tackles incremental ROI, where competing initiatives, each with distinct components, can be disassembled to identify precisely where value added is greatest.

In fact, Marketing ROI, to its author, is not just a math formula to be applied to gauge campaign effectiveness, but an overriding philosophy of building consistent measurement process into all aspects of marketing. It is a journey in search of continual optimization of the relationship between marketing investment and incremental profit. In this context, Marketing ROI can be systematically applied, as the subtitle suggests, right up the ladder from individual campaigns to customer segment management into overall corporate profitability.

Along the way, you are introduced to insightful observations on how Marketing ROI calculations differ from most other ROI models used, for example, by the finance department, and offered simple suggestions for helping others understand those dynamics. You also will find some practical ideas on how to deal with the question of charging marketing baseline activities (e.g., brand advertising, staffing, Web site maintenance, etc.) back to individual initiatives so no expenditures are left beyond measure of financial benefit. The three methods offered — aggregate, allocate, or ignore — have different implications for corporate culture and incentive compensation systems. Yet it's easy to imagine any given marketing department starting with one of the three and customizing the process to their unique needs.

There are, however, a few disappointments in this otherwise well-considered, well-written guide:

1. There's no mention of the potential to enhance ROI modeling with simulation or the risks of continuing to use high, low, and most-likely point-estimates. While Lenskold takes great pains to point out the most common flaws in ROI calculations, he neglects to mention the danger of the flaw-of-averages still baked into most business cases.

2. Like others on this topic, the book espouses the need for separate and dedicated analytical experts running and evaluating ROI models to "keep marketers focused on their core competency of developing and implementing high-impact strategies ..." It assumes creativity and strategic insight are somehow weighed down by the requirement of measuring results, when science has proven that innovation is born of necessity — in this case, the necessity to understand just how much or little margin of error there is in profitability. In our view, financial accountability is part of every marketer's job and should be embraced as a necessary planning component, not a police action to be circumvented by persuasion and duplicity.

In the end, this book is an excellent thought-starter on the key issue of measuring marketing effectiveness. Regardless of your starting point, it will help you further your journey.