When we talk about marketing effect, we quickly end up discussing which key metrics to use. The purpose of marketing is to create sustainable, profitable growth — so our metrics should ideally give us indications of that. One commonly used metric is ROI (Return-On-Investment), or sometimes ROMI (Return-On-Marketing-Investment). Many view this as a measure of profitability, and we often talk about the ROI of our activities. However, ROI involves the risk of incorrect priorities and misleading results.
There are two main problems with ROI.
The first is what we actually mean by the term itself. Mathematically, it’s an equation that calculates return (what I get back) in relation to the cost of the activities — all within a given period of time. But which costs and revenues should we include in that calculation? Campaign costs are one thing, but what about other marketing efforts that affect the outcome? Which outcomes should we include, and what should we compare them to? And how should we treat time — how long should we consider the effect to last?
The second problem has even greater consequences. Because there are diminishing marginal effects in almost all activities — meaning that for every krona I invest and get a return on, the incremental impact decreases with each additional krona invested. The total effect increases, but each extra krona becomes less effective than the last.
Someone trying to maximize the ROI metric therefore tends to do two things:
a) Invest as little as possible to keep costs down, and
b) Invest as much as possible (of the remaining limited resources) in “low-hanging fruits”, since that’s where the effect — and therefore ROI — appears to be highest.
The problem, of course, is that those “low-hanging fruits” would likely have been harvested anyway — that is, most of those customers would probably have bought even without the extra marketing effort. It’s like standing outside the pizza joint handing out discount coupons. The marginal effect on ROI is therefore only high if we don’t compare it to the alternative of “doing nothing.”
Someone who focuses too narrowly on ROI risks missing two important things:
a) They invest in the wrong things (short-term tactical gratification instead of long-term strategic development), and
b) They reduce the company’s opportunity to grow and increase overall returns. It becomes more important to maintain a high marketing ROI than to invest more for greater total impact.
For those who view the company’s business as a whole, greater total impact provides a better return on capital. It may sound paradoxical, but as shown, there’s a real risk that prioritizing campaign ROI actually reduces overall impact, growth, and the company’s profitability.
More — or more profitable?
Another aspect is the balance between volume and margin. If we simplify and look at the measure of effect as the number of responses (qualified leads) from different marketing activities, the differences become clear.
Someone who prioritizes effect wants as much outcome as possible — as many responses as possible — by going somewhat broader. That means additional efforts create more responses, even if the marginal value added for each extra krona invested becomes increasingly limited (but still positive).
Someone who prioritizes efficiency, on the other hand, wants as few “non-responses” as possible and therefore makes campaigns as narrow and targeted as possible to minimize wasted cost.
If we put some numbers to this, it might look like this:
| Alternative | Reach | Conversion | Orders |
| A (broad reach for maximum effect) | 1,000 | 4% | 40 orders |
| B (focused reach for maximum efficiency) | 100 | 10% | 10 orders |
Now let’s assign some money values: suppose the cost per reach unit is 1 SEK, and the contribution margin per order is 50 SEK. Then we get the following results:
| Alternative | Cost | Contribution margin | Net revenue |
| A | 1,000 SEK | 2,000 SEK | 1,000 SEK |
| B | 100 SEK | 500 SEK | 400 SEK |
That means Alternative A has higher effect than B (1,000 SEK vs. 400 SEK), but B has higher efficiency (10% conversion vs. 4%). But which one is actually more profitable?
In this example, most would agree that B has a higher ROI than A, since every invested krona returns 5 SEK — that is, 4 SEK in profit — while for A, the corresponding figures are 2 SEK back and 1 SEK in profit.
However, that view only considers the marketing investment. In a company, profitability is based on return on capital, not ROI on marketing. In the company’s accounting, marketing is treated as an expense in the income statement, meaning marketing efforts don’t affect the capital base. Thus, from a return on capital perspective, it’s better to have a net profit increase of 1,000 SEK than one of 400 SEK.
And one way to make marketing more appreciated is to talk the language of the management and thereby prove the true profitability of marketing.
Do you want to discuss more profitable marketing, just reach out to ulf@sfinxconsulting.se
