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Why RoS is much more important than RoI

Posted by Phil Owens
Phil Owens
Philip is one of Australia’s leading performance and leadership specialists. He
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on Tuesday, 07 May 2013 in Leadership

One of the questions I am often asked when training behavioural marketing is ‘how do I calculate ROI?’ 

Often, it is a tool for justification of a program or marketing activity, and is the point at which ‘management’ get the opportunity to shoot an idea down in flames.

When this arises, I suggest that we go ‘back to basics’, and ask if the proposed investment offers ‘Return on Strategy’, and use a process of logic to test the assumptions. 

Before we conduct an activity, we can never calculate the ROI, we can only estimate it.  It then comes down to the quality of the assumptions which determines if the estimated ROI should be believed or not.

Lets start with a simple model of 'Return on Strategy':

Inputs> Actions > Outputs.

That is, we invest time, energy, money and other resources to create actions, which we believe will lead to positive outcomes.  Fairly simple, but we need to add a few layers to make this model valuable for the business:

Layer 1:  Describing the inputs.  The inputs can only be decided based upon customer and market insights.  These provide the assumptive bases for why we believe the actions we will take will provide the return. 

The clearer your market and customer insight, the clearer you can be about WHY you are taking the action, how it fits with the specific customer change outcome, and the size of the expected change that you attempt to leverage. 

Important also is the type of market – its responsiveness, its cyclical nature, its response elasticity, its saturation, the competition, etc. 

The message is that your activity is not conducted in a vacuum, but in a real marketplace which has a specific dynamic.

Layer 2:  Being specific about the actions.  Setting clear KPIs and ensuring that the actions are directly aligned to the behaviour change plan ensures both the highest chance of success, as well as a means of tracking performance. 

Too often the actions are not considered in terms of the specific outcome objectives – and the marketing is done out of fear (“what if we don’t do it?”) or habit (“But we have always done it!”).  Keep asking ‘how will this specifically drive the desired behaviour change’? and your actions can be refined with the highest probability of success.

Layer 3:  Describing the outputs.  Often, marketers are expected to provide a dollar-based ROI.  However, often the outcomes are a mix of tangible and intangible results.  Increases in sales, increases in uplift, stocking, new customers (or whatever base metric is used) can be quantified. 

There are also other aspects of the outputs which cannot be measured, only estimated – such as change in brand loyalty, impact on influencer effect, brand perception, desirability, recall, etc.  Often we could employ expensive market research to find out about these intangibles, but for many companies, the cost of finding out is more than these things could ever truly be valued at. 

In this case, we can describe the intangibles, and estimate their immediate and future impact, but cannot mathematically estimate or calculate them.  It is how they logically contribute to the realisation of the strategy over time that matters.

Therefore the ROI is actually a ‘return on Strategy’ based upon the logic of the investment decision.  Do we understand our market well enough through the market and customer insights to be able to justify the investments in programs which will deliver tangible and intangible outcomes?  Do we know what outcomes we actually want?

The model can now look like:

(MI[i])> (CI[a])> (T[o]+I[o]).

That is, market driven insight based investments leads to customer insight driven actions which result in Tangible and intangible strategy-related outcomes.

As you think about your marketing, are you sure you are getting Return On Strategy?

How do you know?

If you want to find out how these concepts from behavioural marketing have been applied to a wide variety of businesses, let me know.

Philip is one of Australia’s leading performance and leadership specialists. He honed his skills working with executives and leaders around the world, coaching and consulting in over 30 countries, from entrepreneurial start-ups to boards of multi-billion dollar businesses.

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