Research Return-on-Investment
Calculating Return-on-Investment for Marketing Research
(Last Updated 02/06/2011) Download PDF Version
In a competitive market, for-profit ventures are only successful when they are efficient and make the wisest use of their assets. Due to this simple economic truth, every activity and decision an organization makes hinges on return-on-investment (ROI). For corporate researchers, marketing research (MR) is a means to an end and does not generate revenue unto itself. Therefore, research professionals in these organizations face an important dilemma in measuring their ROI.
Why Calculate ROI?
On top of justifying marketing research as a critical investment, measuring return-on-investment can help organizations in other ways. ROI allows managers to:
- Understand the optimal scope and size of MR activities
- Develop and defend budget proposals
- Measure, track and improve performance
- Explain the tangible value in MR to stakeholders
It is difficult to judge whether time, money and resources should be devoted to an activity if there is no objective evidence to support the contributions of that activity to the organization. Further, it is difficult to budget if there is no understanding of how changes to the funding of MR activities will ultimately affect the company as a whole[1].
Difficulties in Measuring ROI
Despite the importance of measuring ROI, the marketing research profession has no gold standard approach to the dilemma. This is in large part due to the difficulty in quantifying the value of what MR provides. Dr. Chuck Chakrapani, President of Leger Marketing and Visiting Professor at Ryerson College, offers the 4 reasons, cited below:
1. “Marketing Research Can Produce a Return Only If Someone Acts On It”
It’s necessary to know (1) whether the MR resulted in an action and (2) the costs and revenue of that action in order to calculate ROI. Further, MR may result in a decision to take no action.
2. “The Same Marketing Research May Lead to Different Actions”
MR is subject to the action of decision-makers. Given the same research findings, different decision-makers may take different actions with different revenue results.
3. “In Some Instances, the ROI Is Not Worth Calculating”
It is difficult to assign ROI to MR in certain cases. For example, how should ROI be assigned in cases where decision-makers are simply using MR to confirm something that is fairly obvious?
4. “Marketing Research May Be Used As an Input to Many Decisions”
MR findings may be used by many departments, to different degrees, over a long period of time. It is difficult to unpack the ROI MR provided in each of these cases over time. [2]
Marketing research is often a critical part of business actions. However, there are many factors that contribute to success or failure, including context (e.g., confirmation of an obvious fact or business-saving insight), alternative courses of action, management deliberations and cost of inputs (e.g., advertising, sales). Despite this difficulty, numerous researchers and professionals have developed metrics in order to provide at least a reflection of the value that MR brings to an organization. Popular ROI metrics are summarized below.
[1] Chakrapani, Chuck. “the basics of marketing research roi” Vue September 2006:12-14
[2] Ibid.
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Models of Marketing Research Return-on-Investment |
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Model Type |
Description |
Strengths |
Weaknesses |
Citation |
|
Traditional |
Traditional accounting definition of “return on investment”
(Revenue generated by activity – cost of activity) * 100 Cost of Activity
|
· Intuitive & understandable |
· Not sufficient for MR · Does not define revenue · Views MR as investment vis-à-vis other investment activities; not as a function |
(Chuck Chakrapani, 2006) |
|
Subjective Linkage |
The value of information that research is geared to provide is estimated by decision-maker (i.e., user of research findings), this value is then plugged into “traditional” ROI model. If decision-maker is unable to determine value, various techniques may help them to estimate value. |
· Intuitive & understandable · Helps decision-maker understand value of MR · Helps decision-maker understand purpose of the MR |
· Estimates are subjective, not “factual” measures of ROI |
(Chuck Chakrapani, 2006) |
|
Subjective Linkage |
The cost risk associated with making a “bad” decision is estimated. It is then estimated that MR reduces “bad” decision-making risk by x%. The resulting savings are used to determine ROI. |
· Same as above. |
· Same as above. |
(Chuck Chakrapani, 2006) |
|
Subjective Linkage/ Negotiated Value |
· For research on new products, markets and market segments, estimate expected value of new idea. · For product or line extension research, estimate incremental revenue expected. · For advertising research, estimate advert. budget at risk. · Research linking directly with company strategy is given a higher value than research that only has indirect link.
The author’s describe a scenario where the decision-maker and researcher decide the value of MR to the business activity (i.e., X% of revenue can be attributed to MR). |
· Same as above. |
· Same as above. |
(Chuck Chakrapani, 2006; Lesh & Schmalensee, 2004) |
|
ROI Lite |
The decision-maker estimates the degree of confidence research will give them in their decision-making AND the value of the business activity. These inputs are plugged into the formula:
($ Value) X (Increased Confidence) Cost of Research
This method may be used prior to, and after, the research and business activity in order to update/revise estimates. |
· Same as above. |
· Same as above. · “May not be appropriate for exploratory work that will not be used immediately for action.” |
(Lesh & Schmalensee, 2004) |
|
ROI Complete |
Same as “ROI Lite” with the added element of “increased likelihood of taking action” due to research.
($ Value) X (Inc. Confidence) X (Inc. Likelihood of Acting) Cost of Research
|
· Same as above. |
· Same as above. · “May not be appropriate for exploratory work that will not be used immediately for action.” |
(Lesh & Schmalensee, 2004) |
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Department Satisfaction Model |
MR department/function attempts to improve performance and responsiveness through gauging their client’s satisfaction, information needs and use of their research. |
· Increases likelihood that MR will be continued to be used. · Increases confidence in MR function. · Increases chances MR function will be consulted with. · Increases chances that MR findings will be implemented. |
· Not a measure of ROI, but rather a performance measurement and improvement tool. |
(Lesh & Schmalensee, 2004) |