Will the Real ROI Please Stand Up? - How to Wreck a Perfectly Good Equation
(Page 5 of 5 )
Before I wrap things up, I did want to point out one odd variation and one flat out inaccurate abuse of the term Return on Investment. I’m pretty sure I’m going to get a few e-mails from people who have been doing both of these, but I can take it.
The first, the odd variation, is the use of the term Return on Investment or ROI as an esoteric term that has no reference back to the actual equation that bears its name. I hear consultants and traditional advertising agencies throwing this one around a lot in meetings and I find an unhealthy joy from providing an actual percentage when these types ask, “What kind of ROI are you lookin’ for in this campaign?”
The second, the flat out inaccurate abuse, is the substitution of the equation for Return on Advertising Spend (ROAS) for ROI. I recently had someone at a traditional agency try and tell me that the two were interchangeable and I almost passed out. The ROAS equation, which is used to determine how much Revenue (or Sales) is needed to cover the cost of the advertising, usually looks something like this:
The reason this substitution is an abuse of ROI lies in the top half of the equation, Revenue. You can usually pull off just using your Advertising Spend on the bottom half of the ROI equation in place of Invested Capital, but Revenue is never the same as Profit – ever. Using ROAS in place of ROI will result in percentages often well over 1000% and gives the user a false sense of accomplishment. It’s easy to fix, all one has to do is multiply the top by the Profit Margin (or at the very least, subtract the advertising expense from Revenue), but in so many cases, the damage is already done and usually in front of a client.
I Know it's Only ROI, But I Like It...
See? That wasn’t so hard now, was it? A little division, a little multiplication, and now you’ve got a better grasp of if your advertising activity is making you money or just draining your coffers. Sure, it isn’t a perfect equation and far more people use its powers for evil than good, but just the fact that you’ve made it this far in the article means you now have a leg up over the many other businesspeople who don’t even bring this powerful equation into play.
This time, we just did a pass over how the basic ROI equation works. Look for future articles from me that will show you how to use some slight variations on this equation to help optimize your pay-for-placement and other advertising programs.
| DISCLAIMER: The content provided in this article is not warranted or guaranteed by Developer Shed, Inc. The content provided is intended for entertainment and/or educational purposes in order to introduce to the reader key ideas, concepts, and/or product reviews. As such it is incumbent upon the reader to employ real-world tactics for security and implementation of best practices. We are not liable for any negative consequences that may result from implementing any information covered in our articles or tutorials. If this is a hardware review, it is not recommended to open and/or modify your hardware. |
