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ROI and Balanced Scorecards

  • May 30 2003, 1:00am EDT

Measuring the results of marketing initiatives is essential for evaluating and optimizing the allocation of marketing budgets. I have often said that the key metric for measuring marketing programs is return on investment (ROI). However, I was recently challenged on this assertion. Evidently, a company had recently undergone of period of rigorous ROI measurement and had discontinued or not initiated marketing programs that could not be demonstrated to yield a strong ROI. Unfortunately, most of their marketing activities did not make the cut and their revenues were beginning to drop. While I don’t know the details, apparently a strategy of using only ROI as a performance metric was not a viable long-term strategy for this company.

Advocates of the balanced scorecard management method (initially developed by Drs. Robert Kaplan and David Norton in the early 1990s) would have strongly objected to such an ROI- centric management system. Rather, they would advocate a performance measurement system that includes a mix of metrics, including internal business process metrics and business outcomes such as customer satisfaction and financial results.

In fact, I agree with the balanced scorecard approach. But I also think that ROI is the most important metric for program evaluation. This column will explain these points of view.

Why ROI is Critical

At least in the long run, the goal of most companies is to earn high profits. (Of course, I am not suggesting that profit is the best motive regardless of means or cost to others. I am talking about honest, competitive business.) In other words, it is financial results that count – and financial metrics that will be used to measure bottom-line performance. Many different financial metrics are used to measure company performance. But ROI is usually viewed as the key financial metric for judging marketing investments, for one simple reason: a company will maximize its profits by choosing to place its marketing investments in those programs and activities that have the highest ROI.

Of course, profitability is also the goal of a balanced scorecard management system. For a concrete example, consider a marketing department that uses the following metrics to judge the performance of marketing programs:

  • Customer satisfaction
  • Cost per acquisition
  • Percent attrition
  • ROI

All these metrics are related to profitability. But how would we judge the effectiveness of a program designed, for example, to reduce attrition? Reducing attrition is a good thing. But to make the program worthwhile, the reduced attrition must lead to an increase in profit sufficient to provide a return on the cost of the program.
In order to make this judgement, decision-makers must use an explicit or implicit belief about how each metric is related to profitability. In the case of attrition, it is probably straightforward to quantify the relationship between increased loyalty and profit. In the case of customer satisfaction, this is much more difficult.

Most business people rely on an implicit belief that customer satisfaction is critical to revenue. As a general principle, I would agree. But I would also argue that a strong attempt should be made to make the link explicit. If such knowledge is simply unavailable, then make an aggressive assumption. If a marketing program aimed at customer satisfaction still yields a low ROI then maybe it isn’t worth it.

Thus, even when multiple metrics are tracked, each marketing investment should at least yield a strong ROI under some set of reasonable assumptions.

Why ROI isn’t Enough

Why did the company discussed in the introduction have to abandon ROI as the only management metric? Even given the importance of ROI, I see two clear reasons for maintaining a balanced scorecard.

First, complete measures of the ROI of marketing investments are often simply not available. There is a difference between showing that an investment might reasonably have a strong return, as discussed previously, and proving it. Just because you can’t prove a financial return doesn’t mean there isn’t one. Use of a balanced scorecard reminds us that there are many factors that combine in complex ways to influence the full outcome. While the phrase "If you can’t measure it, don’t do it" is usually good advice, it is too extreme to insist that the decision metric is always ROI.

Second, a balanced scorecard provides diagnostic information about why marketing investments are working or not working. ROI is the key financial outcome variable. But simply reporting that the ROI is trending down for a specific marketing program provides no useful information about how to reverse that trend. Separate metrics on the factors that influence ROI (such as customer satisfaction, cost of acquisition and percent churn) can provide a place to start the investigation.

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