MARKETINGPROFS: THE PURSUIT OF ROI: WILL IT LEAD YOU TO RAGS OR TO RICHES?
MarketingProf’s Sharan Jagpal points out the flaws in the standard ROI equation, ROI=Profit/Investment. According to Jagpal, it is especially important to consider risk when calculating ROI for marketing strategy purposes.
MarketingProfs Excerpt:
It is time for CEOs, managers, and decision makers at different levels to take a closer look at this old-school way of doing business and to reassess whether the ROI approach is leading them to rags or to riches.
The idea behind ROI is commonplace in business regardless of whether you’re a CEO or a finance, marketing, or sales executive. As you doubtless already know, the traditional formula goes like this:
ROI = Profit/Investment
So, if your profit equals $1 million and your investment equals $20 million, then your ROI is 5%.
Pretty elementary, right? Well, in my opinion, there are two glaring problems with the ROI metric. First, it measures financial performance without taking into account the level of risk, particularly when assessing marketing strategies. Second, except for simple strategies, ROI is likely to lead to poor decisions—for example, when the firm uses a multimedia plan, sells products to a common customer base, or sells products that share joint costs.
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