ROI

Let's talk about calculating Return on Investment (ROI)

Question: What is the ROI of spending time calculating the ROI of something?

In many large organizations, fear of something new leads to an insistence that the new thing’s benefit be proven before it can be undertaken. Perfect example is social media.

How's that working for you?

People tell me this ROI approach leads to followers, not leaders in a market. It means that the only things tried are those that others have pioneered.

Did Jeff Bezos calculate the ROI of Amazon.com becoming the world's first online bookstore?
How could he? The Web was brand new. He just built it. And later he pioneered again, this time with ebooks by launching the Kindle in November 2007.

Where is Amazon.com now? Net income in 2010 was over a billion dollars.

Did Borders calculate the ROI of building the world's second online bookstore?
They probably did and they would have concluded this newfangled online stuff was silly and just a tiny market compared to these hundreds of great stores they had in prime retail locations. And ebooks? On July 7, 2010 Borders finally opened it ebook store nearly three years after Amazon, perhaps because the ROI calculations finally worked for them.

Where is Borders now? Nowhere. The company closed their doors on the last remaining stores on Sunday, September 18, 2011.

Sometimes vision and guts trumps the business school ROI approach.

Especially with new technologies, a traditional ROI calculation can steer you in the wrong direction.

Thanks to Kenny Madden for the awesome drawing. Kenny works in market development at Spiceworks and spends a lot of time listening and engaging with 1.7 Million IT buyers on how they want to be marketed and sold to. He expresses his passion for sales and marketing in art.

So, Kenny, what’s the ROI of doing these drawings?

Comments

[Mikeclovell]

"Did Jeff Bezos calculate the ROI of Amazon.com becoming the world's first online bookstore?"

Yes, he did.

There is no doubt in my mind that Jeff Bezos calculated the ROI of Amazon.com every single step of the way.

"How could he?"

By counting new unit shipments, revenue, expanding business relationships, the list could go on forever.

"Especially with new technologies, a traditional ROI calculation can steer you in the wrong direction."

I disagree.

Anything worth doing in business needs to be driven through a ROI process, and the best people in business, Jeff Bezos included, become masters of their industry because of how they measure, improve and calculate the capital, both in people and currency, that comes in and out of their business.

[Mack Collier]

Mike, I think David's point is that Jeff didn't have anything internet-based to compare Amazon to (or his idea of what Amazon could be) because there wasn't a successful online bookseller before Amazon. Jeff wanted to create a new way to sell in a very, at the time, unproven new medium.

To your point, yes, I think Jeff did as much research as he could and made his best educated guess at what would happen with Amazon and what sales would need to look like in order for the venture to be a success. But back to David's point, he was still guessing. Jeff could have waited and let someone else build Amazon so he would have a better idea of how successful the venture could be, but by then he wouldn't have built Amazon, he would have built something far inferior because he would have lost the first-mover advantage that Amazon gave him.

Yes, you need to measure and you need to try your best to determine what needs to happen from a venture in order for it to be a business success. But sometimes you have to trust your gut.

[Raúl]

I guess when any project or business is set up to make money as the main reason or one of the few ones you will enter into history as a failed business like borders did.

But when it gets worst is when they start measuring ROE and all the other made up Ratio's to confuse instead of measure.

[David Meerman Scott]

Mack, Thanks for clarifying. What you suggest is what I meant.

Mike, I disagree that everything worth doing needs to be driven through an ROI process. What's the ROI of employing Guatemalan immigrants to rake the leaves under the trees at the company HQ? What's the ROI of painting the walls in the conference room? There are so many things that are done "because it is the right thing to do."

[Joseph Ratliff]

IMO, I think that ROI is certainly a necessary metric for MOST things business...but if business were run like a "ROI robot", then robots would have to be the only employees.

But robots AREN'T the only employees in any business, humans are still employed...so if everything in business was boiled down to ROI (business isn't that simple IMO)...then where would the human "element" enter the equation?

As this applies to social media, I think companies are still trying to adapt to this new format, causing the fear of change that has them trying to analyze it to death for profit's sake before just saying YES, let's actually try to communicate with our customers in public :)

In short, measuring ROI for some big organizations is becoming a distraction from exploring the potential of social media IMO.

I'm still fleshing this thought out of course...but great post David :)

[john moore (from Brand Autopsy)]

While I am not a grammar king, I do know the ROI of my grade school education. That ROI tells me the nifty drawing should read, "I am too busy calculating my ROI."

[Commtracker]

Interesting article. The post is reminiscent of the famous book "Who moved my cheese". Business situation being constantly changing, the traditional ways of calculating ROI (whatever is traditional at that point in time) will be challenged. However, many decisions (certainly not all) would use the ROI yardstick.

We are pushing for improvisation in organizations' communication, and have published a Savings calculator which would help organizations help themselves with their ROI calculation http://www.communication-tracker.com/roi-calculator.html for the same reason.

[Gerardvroomen]

Social media ROI fetishism is the worst type, especially with companies reverting to "safe TV ads" when they can't be shown the social media ROI. As if you can calculate TV ROI. Sure, you can get Nielsen to do a very rough estimate of viewers (much less accurates than online eye balls of course), but you know little about whether people were paying attention or making coffee or Tivo-ing through (although the latter is coming). But somehow people are comfortable enough with TV that they "trust" that very questionable data, but solid yet imperfect data on social media is distrusted.

[David Meerman Scott]

Gerard -- I greatly value your input here. Thank you.

As the leader of an incredibly successful organization, to hear you use the term "Social media ROI fetishism" warms my heart. How can anyone argue with the leader of a company that manufactures racing bikes that have won the world's most prestigious events including the the Tour de France and Olympic gold?

[Rod]

Interesting topic.

Still, I can't help but wonder now, what the ROI of my investing time in reading an article about "What is the ROI of spending time calculating the ROI of something?"

...Caught in a loop!

Actually, I'm all for it. Knowing ROI is key in successful business. If you ignore it, you're wasting business oxygen.

Rod

[David Meerman Scott]

Good one Rod - the ROI of reading business related-content.

I wonder how many of those ROI fanatics have sat down to calculate the ROI of reading the typical business stuff such as the "Wall Street Journal", "Harvard Business Review", and "Fortune Magazine". If they are spending an hour a day on average and they earn $250,000 a year, that's a heck of a lot of dough they need to earn based on the knowledge gleaned from those publications.

Of course, no one calculates that. THis ROI stuff is damned hypocritical.

[Ron Carter]

Interesting post David.

I believe some companies penchant for ROI creates too much analysis which results in paralysis.

[Kim]

I've printed this and posted on my wall (my real one, not my virtual one) as a reminder of a lesson learned. I pitched a brilliant social media project to my boss in January. He of course asked the ROI question, and I started gathering what data I could. Finally, in June, he killed the project because I couldn't give him a date on which we would see the return on our investment.

I licked my wounds and moved on until three days ago when I sat in a customer meeting and had to listen as they excitedly told me about the great social media site they are launching in January--the exact same idea I had a year ago!

I believe there is a place for ROI, but I am very frustrated at the moment with being a follower instead of a pioneer.

[David Meerman Scott]

Ron, exactly. Just look at what Kim went through! Kim, that's tough. The ROI thing makes people do the opposite of take risk and try new things. Keep up the efforts though, they bosses will see the wisdom sooner or later.

[Ronda Thomas]

Lots of money is all what we want to make, but businesses want to make more and as with all business especially new ones they want to know the ROI, but they also want to know what the public’s needs and wants are. Spending time calculating ROI can be a waste of time. The way to ensure that a business is going to be profitable is to do the research, once that is done the owner will be able to calculate the ROI or better yet, make more wise decisions that concern the business. The calculations of course are not going to tell you if your business is going to be a good and profitable business but research, good decision making and money managing skills will always let a business know if they are going to see a great return.
As an acquaintance to a small business owner, she was able to see her business income rising in the third year of operation. It wasn’t until she saw her client count rise that she knew that the public needed her type of business more than before. As her client count grew, her ROI grew, and she never even thought about calculating her ROI. Now when adding in social media, businesses are able advertise their services because they are able to see what the public needs/wants. Facebook, MySpace, Twitter are the top social medias that can assist in the growth of a business. On the other hand without knowing the public's needs/wants and the ROI of a business, there is no or very limited returns on investments. Everyone wants to make money, but there has to be some kind of method to this madness.