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Mythbuster: Marketing's obsession with efficiency
Mythbuster, Les Binet and Sarah Carter, DDB

Les Binet and Sarah Carter get a little bit angry about some of the nonsense they hear around them… like marketing's obsession with efficiency.

We had an email exchange with someone the other day. It was about measuring the profitability of a campaign. It seemed we were talking at cross purposes, until we realised why. We thought we were talking about profit. But they were talking about RoI, and thought it meant the same thing.

This seems to arise a lot now. In much the same way that 'brand equity' was used a decade or so ago, there is a perception that 'RoI' is a good thing, without much real appreciation of what it means. People talk as if profit and RoI (Return on Investment) were interchangeable, but they are not, and it's important to understand the difference.

Suppose you spend £10 million on an ad campaign, and that the profit on the extra sales generated amounts to £11 million. Then the net profit, after subtracting the cost of the campaign, would be £1 million. Net profit is a good measure of effectiveness – the more profit, the more effective the campaign.

RoI, on the other hand, is a measure of efficiency, not effectiveness. It is calculated by taking the ratio of the net profit generated (£1 million) to the cost of the campaign (£10 million). In this case, the RoI would be 10%.

RoI can be a useful measure – for comparing different ways of spending your budget, for example, but making RoI your primary focus can be quite dangerous. To understand why, you need to think about diminishing returns.

As you spend more and more on advertising, it often gets more effective (sales and profits generated go up), but less efficient (RoI goes down). That's the nature of diminishing returns. It means that the highest RoIs tend to come from very small budgets. Compare our previous example with a small budget campaign (Figure 1). If your aim was to maximise RoI, you'd go for the small budget campaign. But that would mean a very much smaller profit. Going for the big budget campaign would mean a lower RoI, but a much bigger profit.

profitability vs RoI

And that's the nub of it. As Professor Tim Ambler points out in his classic article 'RoI is dead, now bury it', advertisers should be trying to maximise profits, not RoI. RoI is usually highest when sales and budget are close to zero, so trying to maximise RoI is a good way to destroy your brand.

This confusion is just one example of a more general confusion between effectiveness and efficiency. They are often used interchangeably, but they can point in very different directions. Effectiveness is about reaching your targets. For instance, sales and profit are effectiveness measures. Efficiency is about how much effort you expend to achieve a given effect. RoI is an efficiency measure.

Sometimes, effectiveness and efficiency go hand in hand. For instance, in manufacturing, broadening the market for your product is often effective (sales and profit go up) and efficient (unit costs go down and margins go up). But in the comms world, they tend to be opposites. IPA research shows that, while pure direct response activity is a highly efficient way to spend budgets, it's not very effective on its own. The sales effects tend to be small, and very short-term, as Heinz found out to its cost in the 1990s, when it briefly junked all its advertising in favour of DM.

Long-running brand campaigns, however, tend to be highly effective (big sales and profit effects), but less efficient without support of activation channels like DM and search. Ideally, we should be effective and efficient. IPA research suggests this means spending the majority of budget on brand (effective), supported by lower spend on direct (efficient). But effectiveness matters most. It's better to achieve your goals inefficiently, than to be a gloriously efficient failure.

This article originally appeared in the February 2013 issue of Admap. Click here for subscription information.

Subjects: Marketing

01 February 2013 10:13

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