ROI, Wal-mart and SKU reduction--and what we may learn about Social Media ROI

I've recently found myself in interesting discussions--one might call some of them debates--about ROI and Social Media.  In recent weeks, Social Media ROI was the agenda for meetings with several clients, the focus of a panel on which I participated at Digiday Social, and a lively topic of discussion at a dinner of marketing leaders in town for the OMMA Global event.  And today I read an article about Wal-Mart that got me to thinking about the dangers of too narrowly defining ROI.

 

It's interesting to hear the wide range of attitudes toward social media ROI.  Some companies measure quite a bit about their social media activities but do not evaluate ROI in its most literal definition:  The financial return generated by a specific monetary investment.  Others go through a great deal of effort to measure ROI, creating complex models to calculate an approximation of financial return. 

 

Some in the direct marketing space are beginning to value their social media efforts much as they do their PPC campaigns--assessing the cost of participation compared to the clicks, conversions and sales generated from trackable links seeded into tweets and Facebook posts.  This sort of measurement is essential and inevitable for companies that sell direct to consumers, but it's important companies not become overly narrow and begin to assess social media as just another click-generating channel. 

 

First of all, that attitude will tend to lead to behaviors that might generate short-term value but harm the brand in the long run.  Constantly posting offers into your Facebook stream will certainly create clicks and sales, but it will also turn off consumers who expect organizations to use social media for something more than just a new advertising medium.  Moreover, taking customers who have enough affinity to join your Facebook fan page and then conditioning them not to act unless an offer is presented seems to diminish rather than enhance brand value.

 

The final challenge with evaluating social media purely based on directly attributable sales is that doing so fails to consider the broader benefits of social media.  While not a social media example, Wal-Mart's recent experience with SKU reduction makes the case. 

 

The retailer embarked on an effort to reduce SKUs by removing items with lower sales from store shelves.  It seems a simple enough business decision, doesn't it?  But Wal-Mart has come to appreciate they made a mistake.  By focusing only on the sales generated by the product and not the impact that product has upon shopper visits, Wal-Mart missed the forest for the trees. 

 

What Wal-Mart found was that they had (in the words of an executive), "discontinue(d) items that don't sell but get you a trip."  Consumers noted their favorite products were missing and began to turn elsewhere, which resulted in fewer trips to Wal-Mart and lost sales of other items that would have gone into the shoppers' carts.  Wal-Mart had the ability to measure the sales of Glad bags, but they could not know the impact Glad bags had on the sales of other unrelated products until consumers started going elsewhere for Glad bags.  Now, Wal-Mart is reintroducing 300 or so products back into stores.

 

Social media is like Glad bags.  You can measure it directly and narrowly, but doing so ignores other important benefits to the brand.  You could remove social media from your marketing mix shelf and see how that works for you, but you'll only end up damaging relationships, harming sales and urgently seeking to restock it into your marketing efforts. 

 

The key is to measure everything and not just one business benefit, no matter how important that benefit.  If you are lucky enough to be able to measure direct sales, by all means do so, just don't turn good luck into bad by ignoring sentiment, purchase intent, awareness and all the traditional measures upon which marketers have always relied. 

 

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Comments

ROI is a lazy marketer's buzzword

I think marketers need to stop using the term ROI altogether. Most have no idea what it means and just use it as a buzzword to suggest they are more accountable than their competitors. What most people mean when they say ROI is measurement of some kind – and we should all be doing that whenever possible. But to measure ROI, you have to measure your INVESTMENT. Personally, I don’t think most brands can do that. They can measure incremental investments on platforms, channels or campaigns, but measuring returns on incremental investments is no way to decide whether or not a new media or methodology actually works.

Marketing is a long-term ecosystem. A brand that is a household name will obviously get a lot more out of the same investment as an upstart – on any platform. Most of us go with what we know. But that has nothing to do with the effectiveness of the particular media. Effectiveness is, in large part, a function of long-term investment in branding, advertising, PR, search, etc. that helps drive awareness and familiarity when you dive into social media spaces.

As you cited with Walmart, all the pieces in the customer experience work together. Marketers need to stop parroting the ROI mantra and come up with better, more precise verbiage to discuss concepts of measurement and accountability.

Finally, there are many intangibles of marketing that you hope to NEVER measure. If your brand finds itself in the middle of a crisis, you’ll be grateful (and so will everyone else) for the smart planning that helped to build up a bank of good will. But focusing on short-term so-called ROI likely won’t do that for you. If you find your brand in social media-specific crisis (remember Motrin Moms, #AmazonFail, @SouthwestAir?), you’ll most certainly wish you’d taken a different approach to marketing investment than incremental ROI.

@CarriBugbee

PS Augie - if you were at OMMA and I missed you, I'm mad now! :-)

Cari, Now you're really

Cari,

Now you're really singing out of the same hymnal that I do. I could have expounded in my post, but I can be accused of too-lengthy blog posts so I kept it short. One of those discussions I referenced was with a financial services marketing leader who insisted--INSISTED--that he had to use the term ROI even though the metrics had nothing whatsoever to do with measuring financial return. In his corporate culture, it was apparently required that the term be used no matter how irrelevant or inaccurate.

I've recommended the term ROO rather than ROI. Return on Objectives means that as marketers we set a goal (lifting unaided awareness, generating increased NPS, improving purchase intent, etc.) and then invest towards achieving that goal. If the goal is achieved, then the investment was a good one.

Your points are all excellent ones, and I appreciate you adding your two cents.

BTW, I was unable to attend OMMA Global due to a conflict, but I made it downtown last Wednesday night for dinner. Next time you're in SFO, please give me a shout!

ROO

Thanks for the term ROO, I do believe I will begin using Return on Objectives as we enter our 2011 planning season. That would force marketers to intentionally link objectives to metrics and in the end, deliberate and intentional marketing critical.

Insurance vs. ROI

Augie,

I agree with you in many ways. ROI is traditionally based as a quantitative evaluation; however, I agree that there are several different ways in which to see the qualitative benefits of an investment. The strength of the relationship between a brand and each individual consumer is something that is extremely difficult to measure, but nonetheless, it is quite possible the most important factor when evaluating a 'return'.

Social media allows for a better ROI than other forms of media because it allows one-on-one interaction at a relatively less-expensive cost. Sending out information individually, in a sense, to these consumers will create an individual touch point that is undoubtedly valuable for brands. Although quantitative evaluations might not be easily possible, the interaction/conversation between brand and consumer will undoubtedly benefit each party.

I think that it's helpful to look at advertising through social media and ROI as somewhat of an insurance policy. Although social media efforts might not result in any significant increase in purchases, it will at least result in a relationship between brand and consumer. Hypothetically, if a public relations disaster occurs three years down the road from the initial touch point, the brand will benefit from the previously established relationships, as well as be able to easily contact consumers that are most important. The already established relationship might result in more loyalty over the years, and when a disaster happens, the ROI is definitely seen. If no disaster--the ROI is not seen; however, the initial efforts were still just as important. Basically, social media provides an inexpensive means to interact with consumers and set a relationship for the future. In most instances, the potential benefit will always outweigh the cost--i.e. it gives brand managers a certain peace of mind.

Joe, You and I agree very

Joe,

You and I agree very much. My point isn't that social media doesn't offer benefits but that ROI is the wrong definition to apply to benefits delivered by social media. While some feel it's just a way of using verbal shorthand--that whether one says "ROI" or "Results" doesn't matter--I believe there is a problem substituting one word for another.

We need to set expectations within our organizations that while much of what social media delivers can be quantified and measured, a great deal of it cannot (or at least takes a significant effort and investment to measure). If we use "ROI" we set expectations about financial measures that are difficult to impossible to measure. Conversely, it is difficult but achievable to set social media objectives and then deliver against those objectives.

I completely agree with your comparison to insurance. In fact, I wrote a blog post about that very analogy: http://blogs.forrester.com/interactive_marketing/2010/01/risk-avoidance-...

Calculating ROI based on KPIs and Managerial Style

The challenge with ROI conversations is often that companies in the same industry measure success in entirely different ways. Wal-Mart was an early leader in converting formerly face-to-face vendor meetings to an electronic process that allowed fewer Wal-Mart employees to manage more vendors. But Wal-Mart looks at the world from the perspective of someone that has taken a very scientific approach to category management, and this approach may not deliver the same results for other retailers that have different approaches to merchandising. That being said, I think receipt data is a critical piece that has universal benefit when married with social media profiles.

I'm interested in understanding how different KPIs will yield different approaches that may be a better fit for store operations. Further, I think social media is intrinsically linked to the way retailers view their local managers (i.e., coaches, firefighters, auditors, micromanagers, etc.) For example, I think one of the key future benefits of sovial will be the ability to shape labor costs to match economic conditions.

I used to work at a grocery

I used to work at a grocery store that undertook a private branding strategy of removing national brands from their shelves and replacing them with house brands. We are not talking about non-sellers. The customers didn't switch. They complained loudly and went to Wal-Mart and Target, their only alternatives in this monopolized market. Worse, given the company's once impenetrable grip on this town, customers would be very happy to shop any other grocer that came to town.

In the bookstore business, different bookstore chains have different backlists. That's how they differentiate themselves. The frontlists are the same across all booksellers. Grocery is bound to be similar.

It's interesting that shelf space correlates to volume across social media channels.