Three years ago I hired one of the smartest people I’ve ever met. She’s just very smart. And not in that disconcerting ivory tower way, in a truly human way.
She used to rate derivatives in the city and even though it is very complicated, in the interview she explained it in a way that I immediately understood.
Since then, she has learned market mix modeling and all things efficiency faster than I thought possible. She makes it look like a walk in the park. She has gone from zero experience to director since that interview, while providing sound and reliable advice to our clients and our team.
If the terminology used to describe marketing ROI is confusing to an amazing woman like her, there must be something seriously wrong. And it’s true, in our conversations, it became clear to both of us that while some key concepts are good, others are downright mislabeled.
The “return on investment” is fuzzy, but achievable
The advertising ROI gets a lot of stick. Professor Tim Ambler of the London Business School wants to bury him. Les Binet says using it recklessly will destroy your brand. And even Andrew Willshire, one of the few outspoken econometricians, says it stinks.
But love it or hate it, you can’t live without it. Anyone who talks regularly with CMOs and CFOs knows this. What you get back from what you spend on advertising is something companies need to know. There’s no going back to the days when ads didn’t need to pay for themselves and intuition was enough to secure budgets.
There is, of course, ambiguity around the return on investment. We are often not as specific about what it really means as we could be. We don’t surround ROI with enough words of clarification.
For example, one objection in Professor Ambler’s article that is very relevant in these times of high inflation is that the return on investment does not take into account the effect of advertising on the willingness to pay more.
“Cost per acquisition” isn’t just a bad label. At best, it’s a serious misunderstanding. This is more likely an outright lie, told because it benefits the platforms that report it.
He is right, it is an important effect of advertising. Modeling of the market mix confirms this: good advertising that is broadcast regularly often makes it possible to charge and maintain a higher price. And the benefit is substantial. McKinsey looked at S&P 1500 companies and estimated that, on average, a 1% higher price would generate about 8% more earnings.
To be specific about this omission, we should add “conservative estimate of” before saying ROI. And we could also be concrete about the time period, “long term” and “short term” mean different things to different people, or swap “investment” for “ad spend” if the effect is short-lived.
These things would help, but they were never something that confused my smart newcomer. Maybe she’s only been in the right kind of market breakdown modeling shop, but in her experience, those details were usually clear at the time of decision making.
The “cost per acquisition” is very misleading
The same is not true for that other ROI metric: cost per acquisition/CPA.
When marketers see “cost per acquisition” in Google Analytics or other platforms, many think that’s what it’s saying: the cost of acquiring a new customer by spending advertising money on the platform.
It is not so, in fact. Dashboards show everyone who clicked on an ad and then bought something as if the sale was caused by that ad. But a large portion of people who click on online ads were already on the verge of buying. Their choice was motivated by an offline ad, an offer, the weather or the economy.
This means that “cost per acquisition” isn’t just a bad label. At best, it’s a serious misunderstanding. This is more likely an outright lie, told because it benefits the platforms that report it.
And the implications are both bad and important. Companies that believe the CPA is what its label suggests allocate massive amounts of money to ads that preach to the already converted.
And that’s a hard mistake to reverse. It’s not uncommon to come across organizations online that can’t stop doing branded PPC even when they’re still at the top of organic listings. When you ask why, it turns out the board is used to seeing that low CPA and doesn’t have time to learn why it’s not right.
“Incrementality” is just weird
So what can marketers who understand CPA issues do? Well, in the absence of a benevolent dictator rewriting the dictionary, the innovation has been to invent ‘incrementality’, ‘additional sales’ and ‘additional cost per acquisition’.
“If a sale caused by an ad is incremental,” I explained to my shrewd friend, “that means it’s a sale that wouldn’t have happened without that ad. It wasn’t going to happen anyway. She raised an eyebrow. “So if it’s not incremental, how is it somehow caused by the announcement?” she asked.
And she’s right, for a newcomer to marketing effectiveness, “incrementality” is a very strange concept.
But we, as an industry, need it. Until the day that all marketers – even those who grew up in the age of Google and Facebook – understand the truth of CPA, we will have to distinguish all sales-that-follow-a-click from sales-caused -by- clicks.
A measure that can put the two things side by side is useful here. We use the table above – which comes from market mix modeling – to help clients understand and evolve their mix. It shows how many sales counted in CPAs are incremental for different online channels.
A manifesto for a makeover
We in advertising happen to know people who are good with words.
Advertising strategists, when writing positioning statements or brand visions, rewrite the same sentence over and over again until they are successful.
They are true experts at distilling the most important aspects of a madness of thoughts, feelings and language. They take the time it takes to throw words around until they end up with something that isn’t right, it’s simple, obvious and clear.
And it’s not like the labels of our industry can never change. These same ad strategists were called planners after all.
Relabeling isn’t something we should be doing just for fun, it takes time and commitment, and many of the concepts we use are good ones.
But for the sake of all newcomers to come, on something as basic as “does it work then?” we really can’t afford to have labels as problematic as they are now.