The Trouble With ROMI

ROMI, or Return on Marketing Investment, is the stalwart of the accountability marketing movement, spurred on by the dozens of dashboard software products and services that promise not only to track the success of your marketing efforts, but change the very nature of the way marketing is viewed in the corporate environment.

Poppycock.

As I told an audience at a recent BMA luncheon at which I was the speaker, ROMI is a Red Herring. It provides a false sense of security to marketers who otherwise have abdicated their responsibility to learn the language and requirements of the finance team, and therefore, the organization generally. Here are the top three reasons that ROMI, while a good tool, is useless in creating real influence in the boardroom, and real impact on the bottomline:

1. ROMI is a metric, not an objective. Measuring click-thrus, phone calls, leads generated are all useful metrics that measure the effectiveness of tactics, not strategies. All too often marketers and professionals from other fields, for that matter, mistake their metrics as objectives. Objectives are far broader than a lead, and marketing needs to recognize the difference.
2. ROMI only measures one of the four Ps. We can debate the current relevance of the four Ps, but putting the debate aside for a moment; ROMI is targeted toward measuring Promotion only. What of Price (price cuts versus premium pricing strategies?), Placement (how to leverage distribution channels?), and Product (feeding customer and market research to effect product changes?). ROMI acknowledges none of that, yet if there was a single ‘P’ whose impact on sales was the most expendable, it would be Promotion… yet it retains the lion’s share of our attention as marketers.
3. ROMI metrics are created in a vacuum. They do not necessarily reflect the concerns of the executive team. The CFO is concerned with EBITDA, not PPC. He/she wants to know about your contribution to EPS, not the circulation of your industry’s leading trade publication. As compelling as some metrics are, finance types are often as guilty as engineers in the ‘not invented here’ mentality. They set the critical metrics, not you.

In the end, finance folks and executives are your customers, and like reaching customers, you need to speak to their needs, not your own.

80/20, myths, and choice

We often think of myths as ancient Greek folktales of Gods and warriors, or in a business seetting, platitudes like 'the customer is always right' (they aren't) and 'the check is in the mail (it isn't).

I built a personal philosophy in my early days using Pareto's Principle, otherwise known as 'the 80/20 rule', believing that it had a place in every fabric of the universe and would, one day, be a key part of the 'meaning of it all'.

Today however, that which was once seen and known is more and more a myth... technology has unwound Pareto, that which I once thought was the very fabric of being.

20% of buyers produce 80% of the profits
20% of staff produce 80% of the results
..and so forth.

Not so fast.

As much as the 80/20 rule has become a standard researchers at the MIT suggest that technology has diminished its influence. The book The Long Tail: Why the Future of Business is Selling Less of More by Chris Anderson suggests this as well. In fact, the book can be found on Amazon.com, where lesser-known titles are now producing 40% of Amazon.com’s revenue.

The long tail at Amazon has been described thusly: “Amazon sold more books today that didn’t sell at all yesterday than Amazon sold today of all the books that did sell yesterday.”

Read that twice. (The long tail refers to the infinite outlier in a standard bell curve.)

In a new MIT report, “Goodbye Pareto Principle, Hello Long Tail: The Effect of Search Costs on the Concentration of Product Sales”, researchers discovered that when comparing catalog to online sales in womens clothing, the 80/20 was only applying to mail order catalog sales. The 80/20 was moot online.

Of course, Pareto still has influence in the natural world: 20% of the trees will still grow 80% of the apples, and you'll still spend 80% of your time with 20% of your friends, but when it comes to the Laws of Choice, it’s changing the way we do business.