by Fraser Likely -- Many in public relations and communications are using the ROI (Return On Investment) financial term in a way that is inaccurate, inappropriate, and dishonest. Real public relations folks don't use spin, and the use of ROI in PR to date is just that: Spin.
The financial profession has always used ROI in a specific way: To measure net, actual returns/revenues against gross, actual investments/costs at the level of the organization. That is, the term describes the final actual money that has been made, after all costs (including product returns and cancellation of sales) have been factored in. Since many departments are typically involved in a sales process (such as marketing, public relations, sales, customer retention/relations, etc.), ROI can only measured after the costs of each are included. Obviously, this can only take place at the level of the organization, not at the level of each function. This is true as well for programs with the purpose of saving money, of cutting costs.
Yet, PR/Communication throws around the term ROI with naiveté and ignorance on a daily basis in blogs, agency web sites, and white papers. Well-intentioned but ill-informed people promote the use of a supposed ROI measure for such activities as: Twitter channel use, media opportunities to see (OTS), PR campaign awareness and intent levels, and even for the PR/Communication department itself. Much of this bogus talk is about the ability of PR or Marcom or Employee Communications to “claim” a financial return—the possible dollar value—for every like, follower, fan, re-tweet, traditional media coverage and impression, share, mention, blog traffic, bookmark, website traffic, or other either intermediary media activity or initial audience engagement activity that may result from the original PR output. Promoters divide the cost of getting the like, impression, etc. into the revenues achieved or costs reduced.
Again, obviously, these uses of the term ROI have nothing to do with net revenues or gross costs. They include only PR costs, not all costs from other functions and thus gross costs, and they use gross revenues or savings and not net revenues or savings. Therefore, they do not match the definition of ROI that a Chief Financial Officer uses.
Even such promoted exemplars as Marketing Mix Modeling (MMM) are not a proper ROI measure. MMM, and its statistical modeling ilk, attempt to show that the OTS result of a PR channel—whether traditional media (earned), social media (shared), or web (owned)—can be equated with a certain number of sales leads. That is, if PR potentially reaches (these are impressions not actual reach) a certain number of possible customers through PR's channels, and no other Marcom channels (advertising or direct, for example) reach the same potential customers at the same time in the same locale, then x% of those who had the OTS will act on the PR message and become a sales lead.
Then, since we know how many sales leads become sales, x% of those possible customers who had the OTS will become an actual sale. Then, if we divide the number of actual sales into the gross revenues, we get a supposed ROI for the PR element, which can be compared to the supposed ROI of the other elements of a Marcom campaign.
Sounds simple—except for two problems. First, ROI is defined by net revenues, not gross revenues. To get net revenues we would have to subtract the sales that were not fully completed (sales returns, etc.). We would have to subtract the baseline sales, sales that would have happened regardless of the incremental sales the Marcom campaign generated. And second, ROI is defined as gross investments or costs. Therefore we would have to include all the costs for marketing, PR, sales, and customer relations.
The big point here is that ROI is a real percentage—based on actual, all-in, revenues and costs—not a guesstimate. In MMM, the calculations are ultimately guestimates.
Two Options: Benefit-Cost Ratio and Cost-Effectiveness Analysis
Now, there are two financial measures that are appropriate for this kind of measurement. One’s called Benefit-Cost Ratio. Typically in BCR, both revenues and costs are guestimates—and really that’s what MMM is, since it guestimates the number of leads generated by PR (typically the variable is gross leads, not qualified leads or leads that turn into actual sales or qualified leads that turn into actual sales minus sale returns) and thus guestimates gross revenues. MMM is not a ROI financial measure but a BCR financial measure when trying to attribute a financial return.
Actually, the real value of MMM is not in the supposed dollar value revenue claim assigned to PR results but in the percentage comparison between PR and the other Marcom channels. Comparison of channel reach against channel costs is a Cost-Effectiveness Analysis (CEA) financial measure, not a ROI measure. Thus, MMM is not a ROI financial measure but a CEA financial measure when trying to determine a cost-per-lead measure and a comparison across channels.
And don’t get me started on those who promote a supposed ROI financial measure by stating that all you need to do is, “Just ask executives or employees to assign the percentage of credit they’d give PR in a particular campaign for the results of that campaign, then divide that percentage into the gross revenues or gross savings and subtract your PR cost – and you get your ROI.” Still haven’t found that formula in any financial text!
If we are to use the financial measure ROI—and we can, though it requires considerably more work and tracking through the full sales process—we should use it as a CFO would. But, in the meantime, BCR and CEA financial measures are good starts. As is dropping the ROI spin.
### (Thanks to BarnRaisers for the image.)
Fraser Likely’s publications examining PR ROI:
Likely, F. (2012). Principles for the Use of Return on Investment [ROI]; Benefit-Cost Ratio [BCR]; and Cost-Effectiveness Analysis [CEA] Financial Metrics in a Public Relations/Communication (PR/C) Department. Proceedings. 15th International Public Relations Research Conference. Miami, March. http://www.iprrc.org/docs/IPRRC_15_Proceedings.pdf
Likely, F. & Watson, T. (2013). Measuring the Edifice: Public Relations Measurement and Evaluation Practices Over the Course of 40 Years. In Sriramesh, K., Zerfass, A., & Kim, J-N. (Eds.), Public Relations and Communication Management: Current Trends and Emerging Topics. Routledge, New York. http://www.amazon.ca/Public-Relations-Communication-Management-Emerging/dp/toc/0415630908
Fraser Likely is President, Likely Communications Strategies. He is an Emeritus Member of the Institute for PR’s Commission on Measurement and Evaluation and a Fellow of the International Association of Measurement and Evaluation in Communications (AMEC). An important practice area in his consulting business is the development of holistic performance measurement systems for Chief Communication Officers. (email@example.com)