ROI should not be used as advertising metric – Lewis
By Felicia Nwosu
Colin Lewis, Founder/ Programmer, DMX Dublin, Ireland’s largest marketing conference has argued that Return on Investment (ROI) should not be used as an advertising metric. He argued that ROI was devised for assessing capital projects where the investment is made once and the returns flow during the following years.
Stating this on his LinkedIn while citing some of the words of Professor Tim Ambler from a WARC piece in 2003, Lewis said: “Marketing people like to say that advertising is an investment, in order not to be treated like any other cost. Advertising is an investment in the future cash flow; and the benefits often extend beyond the current year. At the same time, it is not an investment in the capital project sense.”
Advertising expenditure is usually continuous from year to year and, mostly, maintains the brand and the bottom line. It belongs in the P+L, not the balance sheet.
According to the notable programmer, ROI does not cope well with ongoing future budgets as it is the short-term return divided by the short-term advertising expenditure.
“If advertising is a single, one-off, activity and the resultant future flows of income can be DCFed to present value, then a slightly better case for ROI can be made but it is still wrong. The profit or economic value added, or increase in shareholder value from advertising all require the costs to be deducted from sales revenue. ROI, however, is the net profit return (R) divided by the advertising investment (I).This arithmetic difference between subtraction and division lies at the heart of the problems with using ROI as a performance metric.”
Lewis reaffirmed that ROI gives a false picture, partly as a result of excluding longer-term cash flows, which is the effects on the dynamism of the business and brand equity.
In fact, a drive for increased ROI will ultimately destroy any business, because the cash-generating activity is penalised relative to short-term profit.
“The example is typical: reducing advertising expenditure usually increases ROI. Stretching to improve ROI is sub-optimal in terms of the firm’s goals (profitability, cash flow or shareholder value) and will typically cause marketing expenditure to be lower than the firm should want it to be.
ROI is not so much understood as waved about as a totem to ward off evil spirits, namely those trying to cut advertising expenditure: “We are using ROI to establish the budget, so leave us alone.”
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