Profitability or profitability? Concepts to demystify
“This campaign is slightly less profitable, but much more profitable than before!! »
We have just picked up our words on the phone and we are trying, in 15 seconds, to explain to a client who is looking at his report that profitable and profitable are not the same thing. Our client's main objective metric ( 95% of the time it's ROI) is not adequate to measure all of his objectives on the account.
How many times have you tried to explain this to a client without feeling lost? Instinctively convinced it's the right thing to do, but unable to ignore the very valid counter argument of plummeting ROI.
This has happened to me often, mostly on growing accounts and recently with Banque Nationale Assurances , one of our long-time clients. So I decided to do a test with industry colleagues and realized that not many people could answer with clarity. Here is the conclusion of my research.
Stopping at either of these values in our explanations is a mistake!
Profitability is the relationship between an income obtained or expected and the resources employed to obtain it. The concept applies in particular to companies, but also to any other investment.
The profitability index is the ratio between the cumulative discounted cash flows and the capital invested. In other words, it is the ratio between the present value of future cash flows and the capital invested.
Profitability is an anglicism of the term profitability . The OECD recommends translating it into profitability
As Professor Grange of HEC Montréal pointed out to me , the proper use of marketing vocabulary would rather favor the terms Efficiency and Effectiveness .
I have observed that the confusion generally stems from the fact that the objective of an advertising campaign is often incorrectly defined by its effectiveness (sell X products) or its efficiency (X% ROI) instead of being focused on customer needs such as in the following example.
- Grow e-commerce market share
- Make customers aware of the presence of the online offer
- Sell the maximum number of products on the e-commerce site
- Keep expenses above the break-even point
Effectiveness describes the capacity of a person, a group or a system to achieve its ends, its objectives (or those that have been set for it). Being effective means producing the expected results on time and achieving the set objectives.
- Number of products sold
- Break even
Efficiency is the optimization of the tools used to achieve a result. It is measured in the form of a ratio between the results obtained and the resources used.
Country HAS B VS Sales 10 @ $500 50 @ $100 100 @ $400 CPA $50.00 $150.00 $150.00 Revenue $5,000.00 $5,000.00 $40,000.00 Earnings $4,500.00 -$2,500.00 $25,000.00 KING 900% -33% 166%Efficiency :
- Campaign C – the campaign fulfills its objectives 10 times better than the others. She is very efficient.
- Campaign A – the campaign fulfills its two purposes. She is efficient.
- Campaign B – the campaign fulfills only one of its two purposes. She is ineffective.
- Campaign A – very efficient with 900% ROI
- Campaign C – borderline inefficient with 166% ROI
- Campaign B – The campaign is inefficient with a negative ROI.
Since the main objective is the quantity of products sold above the break-even point, campaign C is therefore the best choice. The highest ROI will therefore not necessarily correspond to a more effective campaign and on the contrary, what is the most effective may not be the most efficient. To properly explain performance, it is therefore necessary to go back to the basics and make sure to clearly define the objectives from the start of the campaign.
- Avoid opposing efficiency and effectiveness. As in this article
- Rather, it is necessary to COMBINE efficiency AND effectiveness within the defined group of objectives.
Food for thoughts : Efficiency is not just about the amount of gains alone. It is possible to integrate concepts such as market capture or advertising to Sale cost in order to bring your analysis model one step ahead of your competitors!