Why ROI fails

ROI fails to be measured for many businesses when Return on Investment (ROI) is a relatively simple calculation.

One that is exceptionally useful for measuring success over time and taking the guesswork out of making future business decisions.

10 experts give 10 reasons why ROI fails. And it has nothing to do with the numbers.

1. No executive mandate to force measuring ROI. “The lack of a true executive mandate to force the needed process and cultural changes across the organization—well beyond marketing’s toy-strewn cubicle walls. Quite simply, without an executive mandate for change, your marketing ROI effort is highly unlikely to do anything but waste months of time and goodwill.” – Marc Blumer, VP, Director of Demand Generation Strategy, Slack + Company
2. Lack of alignment between sales and marketing on ROI measurements. “Marketing and sales leaders are trying to work together, but still struggling to operate in lockstep. Marketing automation and CRM tools begin to connect the dots. They fail, however, to capture the interplay between marketing’s impact on awareness, trust, and confidence across paid, owned, earned, and shared channels, and sales’ ability to sell, sell more. The need to add in and analyze other factor that influence the customer journey.” – Kyle Brantley, Co-Founder and Chief Customer Officer
3. Not setting SMART goals. “SMART goals are: 1) Specific, 2) Measurable, 3) Attainable, 4) Relevant and 5) Timely. SMART goals respond to and produce clear actionable data. They encourage multiple departments to collaborate and allow for perfect alignment with organizational objectives. Even if targets are not met, SMART goals give results expressed in universally understood metrics, allowing you to learn, grow, and be better prepared for your next attempt.” – Emma Astroth, Marketing Director, SIO Digital
4. Letting hot leads grow cold. “A surprising number of companies launch a shiny new marketing campaign but fail to prepare the sales department for an increase in sales volume: you launch your plan, hot leads come in, sales staff is overwhelmed, hot leads become cold leads. An effective marketing plan requires a scalable sales infrastructure to ensure the organization has the capacity to adapt and manage lead flow.”
5. No baseline. “Without the Baseline you have nothing to measure against and little, if any, control of your blog project and the progress you want to make.With the baseline you can start to compare your performance improvements over time and showing how you are getting better at measuring ROI.” – Urs E. Gattiker, ComMetrics
6. No Key Performance Indicators (KPIs). Having SMART goals is one thing, but if you’re not monitoring your progress and breaking down your goals, but uou need to make sure they’re attainable, after all, and have a regular schedule for checking your progress. KPIs are also vital in a measurement framework. Ultimately, these show how effective your company is at achieving its business objectives. – Gertie Goddard, Noisy Little Monkey
7. Customer relationships are managed by software platforms, not people. “The experts warn you against assuming that everything is well and fine just because you’re connecting to your customer with a CRM. Building relationships with your customers is an evolutionary process. Be aware that customers tend to evolve and change, and your business may need to evolve and adapt to their ever-changing needs.” – Amer Wilson, Rolus Tech
8. Companies isolate analytics from business operations. “Struggles abound when analytic capabilities are developed and applied far removed from the business, within pockets of poorly coordinated silos. To make this work, a hybrid model to develop initial, centralized capabilities.” – Dennis McCafferty, eWeek, Baseline and CIO Insight
9. Focus on customer acquisition vs customer retention. “Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. It makes sense: you don’t have to spend time and resources going out and finding a new client — you just have to keep the one you have happy. If you’re not convinced that retaining customers is so valuable, consider research done by Frederick Reichheld of Bain & Company (the inventor of the net promoter score) that shows increasing customer retention rates by 5% increases profits by 25% to 95%.” – Amy Gallo, Harvard Business Review
10. No strategy. “Without a strategy, there can be no ROI. The “R” in ROI implies that there is in fact a return to be had. As such, the return must be defined through objectives and ultimately strategy development.” – Danna Vetter, VP, Consumer Strategies, ARAMARK

Do these reason make sense to you why ROI fails? Are you interested in creating an ROI that succeeds for your business?

ROI research (Return on Investment) is a key consideration for companies pursing or thinking about pursuing the hottest digital trends:

• Artificial Intelligence (AI)
• Big Data
• Digital Transformation
• Influencer Marketing
• Mobile Apps

Each of these areas is about innovation with the goal of saving companies time, money and providing better and more personalized customer experiences.

But the reality is they are big endeavors that also require big investments and often infrastructure change. So how much? For how long is required? When does it pay off?

Here is the ROI research on the 5 hottest digital trends.

ROI research on Artificial Intelligence (AI)

70% of companies claim they’re using a form of artificial intelligence (AI). This includes machine learning, deep learning, natural language processing, and cognitive computing. Manufacturers worldwide are looking to technologies through artificial intelligence (AI) to increase efficiencies and avoid disruption from industry newcomers. KPMG surveyed 299 global manufacturing CEOs, and another 73 from the US. The conclusion for their ROI research: AI investment could take up to 5 years, 56% of manufacturing CEOs say.

ROI research on Big Data

Big Data adoption reached 53% of companies in 2017 according to the NewVantage Partners Big Data Executive Survey. 84% of survey respondents name factors related to speed, insight, and business agility as the primary reasons for big data investment. Tech Republic reports that ROI on big data can be delivered in 6 months if companies outline a very specific business case and outcome for the big data investments. Examples include sensors to shorten delivery routes or reduce in-transit theft. Behavior data to better understand consumer preference and relationship to sales. Wikibon research claims, the average Big Data project delivers a 55 cents ROI for each dollar invested.

ROI research on Digital Transformation

88% of companies report they are undergoing digital transformation. This year, according to IDC, companies around the world are expected to have spent a total of $2.1 trillion on digital transformation. The network is at the heart of any digital transformation according to IDC. No network means no business. Yet IDC has stated that in the next two years almost a third (30%) of large and midsize businesses will suffer a service failure due to mismatches in power delivery and IT workload profiles caused by hardware obsolescence. A DT-ready network can be surprisingly affordable achieving an average return on investment of 349% over five years and payback in as little as six months. Automation is an essential element of such a network; an IDC study found that companies lowered their networking costs by 33%.

ROI research on Influencer Marketing

75% of marketers are using influencers as a marketing tool and many plan to increase spending 43% in the next 12 months. A study on influencer marketing showed that it can give an ROI of 11X more than banner ads. A Celebrity Intelligence survey found for $1.29 beauty brand spend on beauty influencer, they are generating a return of $11.38. According to Tomoson, $6.50 in revenue is generated from every $1 invested in influencer marketing strategies. Finding the right influencers for the right campaign is one of the most frequent difficulties faced by nearly 68% of the marketers.

ROI research on mobile apps

58% of all connected consumer time takes place in mobile apps, according to digital research firm comScore. According to a report by Gartner, mobile apps will be responsible for generating a revenue of $77 billion by 2017. Mobile apps are a core ingredient in the future of tech in our everyday lives. ROI research on mobile apps is determined based on the function and goals of the app. It’s different to develop mobile games to make money than to create a free corporate app to enhance your brand and be able to connect more directly with your customers. But ROI is also pretty basic for mobile app. The primary markets are the Apple Store and Google Play. They offer tools for keeping a record of the times our app gets downloaded, as well as from which countries it was downloaded from and user performance data. You can also check the comments and opinions left by those who have tried our app and the error reports it may have generated to act accordingly and get these problems solved in future updates.

Does this ROI research help you in your pursuit of these innovative technologies. Could your company benefits from a ROI assessment for any initiatives you may be doing or thinking in these areas?

Calculating ROI (Return on Investment) is based on a simple formula involving the gain from an investment, the cost of the investment and the resulting ROI. Here it is:

Yet, to many, it is one of the most desired but vexing business measurements. Why?

Here are the 10 most common mistakes businesses make in calculating ROI.

1. CONFUSION BETWEEN CASH FLOW AND GAINS: A common mistake in calculating ROI is comparing the initial investment, which is always in cash, with the gain as measured by profit or (in some cases) revenue. And not basing the gain on cash flow. For example, customers might be billed but that doesn’t mean they all pay on time. Or shipments might have gone out. But some goods might have been returned. The correct approach is always to base the gain, either profits or revenue, on the cash flow received.
2. UNDERESTIMATE INITIAL COSTS: Many businesses try calculating ROI without first properly accounting for all initial costs. As a result, they may end up underestimating initial costs. Before you start your calculations, know what your initial costs are. Here are some of the areas that might be missed.
3. FAIL TO INCLUDE PEOPLE’S TIME: One of the reason ROI is a highly regarded measurement is it includes not just out-of-pocket costs but operational costs like labor. Most business owners are aware that time is money for any company. However, when it comes to calculating ROI, they forget to consider the value of their time or that of their employees.
4. DON’T KNOW THE MINIMUM RETURN REQUIRED: Take into consideration the minimum ROI that your company requires because there probably is one. Look at the relative risks, cost of capital, and opportunity costs. Here’s what experts say is a good ROI for various industries. Even if it hasn’t been formally stated, have the discussion to bring it out when you start calculating ROI.
5. MEASURE THE WRONG THING: In 2010, Pepsi launched the Pepsi Refresh Project, an initiative where people could submit and vote for their favorite nonprofit projects to receive grants from Pepsi. The project generated 3.5 million Facebook likes, 60,000 Twitter followers, and over 80 million votes for nonprofits. But it didn’t sell more Pepsi. Pepsi cancelled the project in 2012 after falling from second to third place in national soda market share. It was a noble initiative, but likes, followers and votes were not the right measurements for ROI.
6. MEASURE TOO MANY THINGS: In data-rich environments, it’s easy to lose sight of the metrics that really matter. Before calculating ROI, know the Key Performance Indicators (KPIs) for your business. KPIs are the metrics that matter for any business. They are metrics that, just like your ROI, have a target. If you don’t know them, you may find yourself measuring too many things.
7. DON’T LEVERAGE EXISTING CAPABILITIES: A manager at a large wireless telecommunications firm recently called for help with her budget. She’d “taken a stab” at quantifying the ROI for the company’s data warehouse and wanted to review her calculations. Her worksheet—which included a rigorous mix of hardware, software licenses, maintenance, burdened staff, and consultant costs, etc.—made clear that she’d forgotten an important step: Leverage current IT infrastructure and resources to reduce cost estimates and make a project more attractive to business executives.
8. DON’T GET THE BUSINESS TEAM INVOLVED: No one wants to own ROI. Calculating ROI can be difficult; understanding all the required skill and resource components can challenge even the best manager. When the planning phase of a project occurs, most managers take it upon themselves to calculate ROI on their own. It’s important that baseline ROI numbers are adopted by a team and accepted by the key business stakeholders.
9. DON’T ACCOUNT FOR THE FULL SALES CYCLES: In the B2B buying process, it can take many months for a prospect to go from first touch to closed sale. If you try to calculate your ROI too soon, you may undervalue the amount of impact that investments are making. In the B2C buying process, it may take time to generate awareness, educate consumers and gain trial. But, once you do, buying frequency might increase at that point. Pick a time period to measure your ROI that makes the most of the resources invested.
10. DON’T ACCOUNT FOR CHANGE: Nothing is certain. You can’t know what competitive developments, new trends or surprises might occur during the measurement period for your ROI. So don’t treat ROI as an area that you “set and forget.” Look at it regularly. Evaluate against KPIs. And be prepared to make revisions as necessary. Anything worth measurement should be view with the most current data.

Do these mistakes help you to understand the correct way to calculating ROI. Does your business need help in doing and managing ROI.

Good ROI measures the profitability of investments and helps objectively assess future success.

ROI also demonstrates how skilled the people in charge are at generating profitable growth and managing company funds wisely.

What is a good ROI? 10 experts state explain their standards for a range of industries.

1. Adverstising
2. Business Owner
3. Customer Relationship Management (CRM)
4. Customer Service
5. Entrepreneur
6. Investing
7. Marketing
8. Digital Marketing
9. Real Estate
10. Restaurant
11. Venture Capital

Here’s what they have to say.

GOOD ROI FOR ADVERTISING (GOOGLE ADWORDS)

“Research show businesses make an average of $2 in revenue for every $1 they spend on AdWords. According to Google, campaigns that use the Conversion Optimizer achieve a 21% increase in conversions while decreasing CPA by 14% on average.” – Elisa Gabbert, Sr. Manager of Content and SEO, WordStream

GOOD ROI FOR A BUSINESS OWNER

“Strive to make at least triple the value of the hard cash you have invested in your business. Average angel investors and venture capital fund investors shoot for a return of 4 to 10 times their invested capital.” – Start on Purpose

GOOD ROI FOR CUSTOMER RELATIONSHIP MANAGEMENT (CRM)

Nucleus Research finds that for every dollar spent on CRM implementation, returns can peak at a stellar $8.71 (2014). That’s a $3.11 jump from three years ago when the strongest returns topped out at $5.60.” – Sarah Brigham, Nutshell

GOOD ROI FOR CUSTOMER SERVICE

“In research on actual customer transactions published in the Harvard Business Review, researchers found that among thousands of customers studied, customers who had the best past experiences spend 140% more compared to those who had the poorest past experience.” – Elen Veenpere, Groove

GOOD ROI FOR AN ENTREPRENEUR

“My advice to entrepreneurs is to try to at least double total invested capital plus the value of any contingent liabilities associated with guaranteeing bank debt, real estate leases and equipment leases. Building a successful business is hard work. Earning a salary is not enough to compensate for all the risks and effort involved with business ownership.” – Susan Schreter, Fox Business

GOOD ROI FOR INVESTING

“A really good return on investment for an active investor is 15% annually. It’s aggressive, but it’s achievable if you put in time to look for bargains. ROI, or Return on Investment, measures the efficiency of an investment. For every dollar you put in, what kind of profit can you expect.You can double your buying power every six years if you make an average return on investment of 12% after taxes and inflation every year.” – Trendshare

GOOD ROI FOR MARKETING

“A good ROI for marketing is 5:1. A 5:1 ratio is middle of the bell curve. A ratio over 5:1 is considered strong for most businesses, and a 10:1 ratio is exceptional. A 2:1 revenue to marketing cost ratio wouldn’t be profitable for many businesses, as the cost to produce or acquire the item being sold (also known as cost-of-goods-sold, or COGS) is about 50% of the sale price. For these businesses, if you spend $100 in marketing to generate $200 in sales, and it costs $100 to make the product being sold, you are breaking even. If all you accomplish with your marketing is break even, you might as well not do it.” – Chris Leone

GOOD ROI FOR DIGITAL MARKETING

“According to Neilsen, the average marketing return on investment is $1.09. A $1.09 ROI means that for every $1 spent, the company generates $2.09 (for a profit of $1.09). The top 3 marketing media with the highest average return on investment are email marketing, search engine optimization, and direct mail. Tracking source of sales to be able to calculate return on investment from your marketing initiatives is critical to being able to improve the effectiveness of your marketing spending.” – Profitworks

GOOD ROI FOR REAL ESTATE

“Without using any debt, real estate return demands from investors mirror those of business ownership and stocks. The real rate of return for good, non-leveraged properties has been roughly 7% after inflation. Since we have gone through decades of 3% inflation, over the past 20 years, that figure seems to have stabilized at 10%.” – Joshua Kennon, Managing Director, Kennon-Green & Co. 

GOOD ROI FOR A RESTAURANT

“If by ROI you mean the profit realized annually by the average restaurant, it is very consistent across the industry: 3–5% according to several sources. Extremely well run restaurants or very high-end places might make as much as 10%, but those are the exceptions — not the norm. I would be very suspect of any restaurant that claims to achieve 15–25% net profits.” – Chuck Rogers, New Orleans Restaurant Owner

GOOD ROI FOR VENTURE CAPITAL

“Venture capital (“VC”) funds, as well as experienced angel investors, specialize in investing in startup and growth-oriented privately held companies. They understand the statistical risks of business failure within their investment portfolio. They know that on average, only four out of 10 investments in promising entrepreneurial companies will deliver any profit to VC fund investors. This is why VCs and angels aim extra high and turn down investment opportunities that don’t represent a “grand slam home run potential” to the overall fund.” Susan Schreter, Fox Business

Do these example help you understand what is a good ROI and why? How is your business measuring up? Or, if you don’t know, do you think it’s worth knowing what is the ROI for your business?

ROI (Return on Investment) is the basis from which informed investment decisions are made.

The ROI formula only requires two numbers; the cost of your venture and the return made from that venture. But there are inputs that go into each. For many, this is where the simple gets complicated. But it doesn’t have to be?

Here are 8 surprisingly simple steps to calculate ROI.

STEP #1: START WITH A BASELINE

Return from a new venture has to first take into account what occurred before. So you have to establish a baseline. In our experience, there are only three baseline scenarios. In Scenario #1,  the venture is just beginning so there is no baseline. There is a clean slate. In Scenario #2, the new venture is trying to change just one area of a company’s operations (e.g. digital, call center, human resources). The baseline in this case is the return in this area from prior period. In scenario #3, the venture involves a change or transformation in the company that likely to impact a number of areas. For example, a business generates revenue through a sales force, call center and website. They are investing in digital operations by upgrading the website, building a mobile app and improving the online selling infrastructure so they can spend less in other areas. In this instance, the baseline is the amount the website generates currently based on a total percent of the company’s operations.

STEP #2: DECIDE IF RETURN IS REVENUE OR PROFITS

Be clear at the outset how you will measure the return in dollars. Is it revenue (sales) or profits? The latter in many cases is the most desirable measure. But it is harder to understand and control. For example, a company produces a food product. Profits requires a knowledge of the cost of goods, shipping and retail allowances. These are often hard to know now and harder to predict in the future. Because revenue has more factor within a company’s control, it is generally easier to forecast. While some insist profits is the way to go, in our experience, revenue is also is a good indication of success and basis for decision making.

STEP #3: DETERMINE THE TIME FRAME

Before you can determine the return, you have to know how long it is going to take. In most cases, the time frame for ROI is between one and two years. This is due to: 1) Functional activities like the time it takes to create and build new assets (e.g. website, data center and buying infrastructure) and 2) customer uptake for awareness, consideration, trial and repeat purchases. To help understand customer uptake, it helps to know the buying frequency and Annual Customer Value (ACV).

STEP #4: DECIDE INPUTS FOR THE RETURN

The return is a prediction or forecast of what will occur by the end of the time frame. Use real company data, not norms or averages, unless you want normative or average results. Basics that are usually included in returns are how many new vs repeat customers are expected? What is their Annual Customer Value? If there is a digital component, what are visits and conversions rates to the website? If a company transformation is expected, operating costs in other areas that will decline as new capability are built can be a factor. There can be a few to many input. Confidence in the data means reliability in the return.

STEP #5: IDENTIFY THE INVESTMENTS

In some cases, this is self-evident. But not always. Let’s say a major investment in infrastructure is occurring that will take a couple of years but the ROI time frame is one year. The investment is based on cash flow and what is spent in that year.

STEP #6: CALCULATE THE ROI

The ROI formula is: Return – Investment/Investment X 100%. The ROI is expressed as a percent. That’s it. Here is the formula and a sample calculation.

STEP #7: GUIDE WITH KPIs

An ROI is a forecast of a result to occur in the future, a scorecard of key metrics is developed to keep ROI on track. These are Key Performance Indicators or KPIs.  A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. To keep the ROI on track, KPIs are an actionable scorecard. Variables that figure into the return like returning customers, new customers, annual customer value and conversion rate might also be KPIs. Here is what a KPI scorecard looks like for a new digital marketing venture.

STEP #8: ALIGN WITH DESIRED GOALS

ROI is key to evaluating how realistic is the business objective and financial goals for a company. In the ROI calculation above of 238%, the company is expecting a return of $2.38 for every dollar invested. The company has to decide how if realistic this is. It is if the company has the commitment and deliver on their plan and measure success. It probably isn’t if they don’t. But now they have a basis for evaluation. Otherwise, the company is just guessing.

Do these steps to calculate ROI sound simple and sensible to you? Do you need help figuring out ROI at your company?