Understanding ROI.

I often see the term ROI, or return on investment, thrown about pretty casually without a clear understanding of what it means. And then I saw this post by Robert Scoble, who has often claimed that ROI isn’t important, where he compares two videos and asks which one has better ROI. And then he makes this comment in the comment section:

The more interesting question is “would they have the same ROI even if they had the same cost?”

First of all, if they had the same cost, the ROI would only be the same if they had the same return.

But there’s the rub. It seems that many people, including Robert perhaps, misunderstand what the return is. I’m fairly certain that both AMD and Adobe believe that the return is the number and value of sales they make, not how many people view their video.

And these are also companies with vastly different markets. Adobe needs to convince a customer to spend $500 on a piece of software, or perhaps a corporation to but a few copies. AMD is trying to convince a hardware OEM to bet the farm on their components, in a relationship that might be worth millions. While a million dollars spent on a website might be overkill, a short video shot in a afternoon probably won’t do it either.

But at some point, perhaps a quarter or two out, these companies can trace their sales to their videos or other sales tools to determine the ROI of those tools, as any good marketing department should.

Even in television, the only time viewership matters is in determining ad rates. But Budweiser wouldn’t be advertising during the Superbowl if they didn’t see a sales increase as a result.

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