Profit or profitability? Measure the real value of a campaign

“This campaign is bringing a slightly lower return on investment, but it’s a lot more profitable!”

You’re on the phone with a client and trying to explain, in 15 seconds, as they’re looking at their report, that profit and profitability aren’t the same thing. Your client’s main metric—95 percent of the time it’s ROI—isn’t sufficient to track all of the account’s objectives.

How many times have you tried to explain this to a client without sounding like you’re insane? You might be instinctively convinced that you’re right, but at the same time completely unable to ignore the highly valid counterfactual presented by an ROI in freefall. This has happened to me a lot, mostly on accounts in a growth phase.

So I decided to test my colleagues in the industry on this issue. And I realized that few of them were able to provide a clear answer. My conclusion, based on this research, is that dwelling on one particular value over the other in our explanations is a mistake!

Before I show you the most accurate method for evaluating a marketing campaign, we need to clear up a few basics. Let’s take a look at the definitions of profit, profitability, effectiveness, and efficiency, then see how those terms apply in a concrete example.

Profit

The term profit “refers to the total amount of money a company earns after accounting for expenses during a specific period. This can be a week, month, quarter, or year. [...] Profit = Total Revenue – Total Expenses.”

Profit is closely related to the rate of return, as both measure the relationship between what you receive and the resources you invest to obtain it. These two concepts apply not only to a company’s revenue, but also to any type of investment (e.g., marketing or media campaign).

In short, did you receive a return on the amount you invested?

Profitability

Good old Wikipedia explains that the profitability index is the relationship between current cumulative cash flows and the initial capital invested. In other words, it’s the relationship between the present value of future cash flows and the capital invested.

However, rate of return and profitability don’t help to clarify anything. As pointed out to me by HEC Montréal associate professor Camille Grange, a more appropriate use of marketing vocabulary would instead involve the terms “efficiency” and “effectiveness.”

These are the two concepts that really allow you to understand marketing performance.

Effectiveness

Effectiveness is the capacity of a person, group, or system to produce a desired result or meet its own objectives (or those that it has been assigned). Being effective means producing expected results within a specified time frame and achieving predetermined objectives.

1. Number of products sold
2. Break-even point (profit)

Effectiveness does not solely consist of the amount of profit. It’s possible to include other concepts, such as market capture or advertising cost of sales (ACOS), in order to put your analytical model one step ahead of those of your competitors!

Efficiency

Efficiency is the optimization of tools that are implemented to achieve a result. It measures the relationship between results obtained and resources used.

1. Return on investment (ROI)
2. Cost per action (CPA)

What is the difference between effectiveness and efficiency? A concrete example

I’ve noticed that the confusion around these terms generally comes from the fact that the goal of an advertising campaign is often (wrongly) defined by its effectiveness (selling X products) or its efficiency (X% ROI). But the goal of marketing should instead be focused on the needs of the client.

To understand this better, let’s look at the hypothetical example of a brick-and-mortar store that has just opened its e-commerce site.

Its strategy:

1. Grow share of market in e-comm.
2. Promote awareness of the online store among clientele.

Its objectives:

1. Sell the maximum number of products on the e-commerce site.
2. Keep expenses above the break-even point.

Let’s imagine that the company has conducted three marketing campaigns in the course of a year in order to sell its products above the break-even point.

Analysis: Which is the best marketing campaign?

Effectiveness

First, note the results in terms of effectiveness, specifically the sales produced (revenue) and the break-even point (profit).

• Campaign A – effective, because the campaign met its two objectives ✅
• Campaign B – ineffective, it only met one out of two objectives ❌
• Campaign C – very effective, because it overachieved on its objectives by almost 10X compared to the two other campaigns ✅

Efficiency

Now let’s look at efficiency, where we’ll see that the ROI and CPA will change the interpretation of results.

• Campaign A – very efficient, with 900% ROI ✅
• Campaign B – inefficient, with a negative ROI ❌
• Campaign C – efficient, with an ROI of 166%, despite not being the best performer in terms of this indicator ⚠️

And the ad campaign winner is…

The company’s objective was to sell a quantity of products above the break-even point. So Campaign C is therefore the best choice. It generated the most revenue on sales ($40,000), and the most profits ($25,000). Here, efficiency (ROI) becomes secondary. The most important thing is to deliver on the objective.

What really counts: Your objectives

Profits or profitability? In marketing, you’d be better off focusing on BOTH effectiveness AND efficiency. Because in reality, neither one nor the other is enough on its own.

The highest ROI doesn’t necessarily correspond to the most effective campaign, while on the other hand, what is most effective isn’t necessarily also the most efficient. Mike Myatt, a consultant for Fortune 500 companies, writes, “Stop focusing on being efficient—it’s a waste of time.”¹

For a true assessment of performance for a marketing campaign, the real question should be: Were your objectives achieved?

At adviso, we love to design strategies that are aligned with your business objectives. Our experts can help you with everything from your strategic vision through to campaign deployment. Talk to us about your project today.

REFERENCE

¹Avinash Kaushik, Your Web Metrics: Super Lame or Super Awesome?, June 28 2011.

The article “Profit or Profitability? A Few Concepts Ripe for Demystification” first appeared on adviso.ca