Tom Asacker

• Home
• Tom's books
• About Tom
• Thought pieces
• Contact

Watch highlights from Tom's speeches

 

Voltaire on common sense

"Common sense is not so common."

Maybe it's me. I'm not sure. I think I'm fairly smart, especially in matters of business, economics, etc. So what am I missing?

Last night I was perusing the latest issue of Direct Magazine when I came across a commentary titled "Return on Customer: Setting the Record Straight."  Here are a few excerpts from Don Peppers and Dr. Martha Rogers, authors of a new book, "Return on Customer: Creating Maximum Value From Your Scarcest Resource":

First, it's important to understand that Return on Customer is not just another way to express return on investment using customers. ROI and ROC are in fact completely different metrics, and will produce completely different decisions. Virtually all the financial measures now being used to evaluate marketing decisions have a fatal flaw: Each assumes there are an infinite supply of customers and prospects.  But the truth is that most firms run out of customers before they run out of cash to invest in them.

To take a very simple example, suppose you are considering two different marketing initiatives, as follows:

- Treatment A requires a $10 investment per customer to create $20 in total value, so ROI = 100%.

- Treatment B requires a $20 investment per customer to create $35 in total value, and therefore ROI = 75%

Most people would choose Treatment A because it has a higher ROI. Every dollar invested in Treatment A yields $1 in net profit, compared with only 75 cents in profit per dollar invested in treatment B.

But what if your firm only has, say, 1,000 customers altogether. If that were the case, then Treatment A would create $10,000 in net new value from customers available ($10 net value per customer times 1,000 customers), but Treatment B would result in a larger total of $15,000 of net new value ($15 net value per customer times 1,000 customers).

Clearly, choosing your marketing initiative based on ROI would produce the wrong decision in this case, while ROC would produce the right one. (ROC will give the correct result every time, in fact, provided that ROC is greater than zero and the ROI you achieve remains above your cost of capital.)

Clearly, huh? Let me ask you, dear blog reader. Since when has anyone made a decision to invest capital, without a forecast of the total return on that invested capital? ROI, which is the same damn thing as Return on Capital Employed, is a simple measure of profitability. Profit returns divided by the volume of resources devoted to the activity.

Do Peppers and Rogers really believe that people are that stupid; are they simply looking for an angle to sell more books and consulting services (and it's certainly not a clear-eyed angle); or is it a little bit of both?  You tell me.  Am I missing something here?

Posted October 17, 2005
Email this post     

The comments to this entry are closed.