March 7, 2021

Why Do Some businesses Not Follow Return On Investment Rules?

Dr Peter Mowforth

Ask anyone in business if they know what ROI means and there’s a unanimous chorus of “Return on Investment”. In money terms, if you invest X then you get back Y. Provided the return is greater than the investment then you can generate a profit and all is good. Sounds rather obvious and easy to grasp. The problem is that over the years we have come across a surprising number of business people whose behaviour suggests that this simple business tenet is not always followed. Lets consider a bit of background, few examples and a few possible explanations along with those all important remedies.The psychology behind ROI was first investigated by BF Skinner during the 1950’s. His approach to behavioural science was to investigate the relationship between an action (investment) and a reward. One generalised observation across his experiments was that the subjects of the experiment would invariably do all they could to try to cheat the system. Even when there was a clearly learned relationship between repeatedly having to press a button/bar and getting a reward, the subject would get bored with the reward and try alternative experiments. Their objective was to try to find an even better deal. Best of all, would be if they could get the return without any investment at all (a.k.a. cheating). For Darwinian evolution, this reliance on random experimentation may have benefits for the group. Unfortunately, results for the individual are rarely optimal.At INDEZ we have witnessed the situation where an ecommerce business that’s getting good ROI from adwords will, for no apparent or logical reason, cut back on adspend after which sales reduce and the business starts to go backwards. This can be hugely frustrating for the Adwords Marketeer. The question for the marketing person is to find out whether this is simply a business owner following the shallow business reflex of cutting costs or whether it’s tapping into the observation from behavioural psychology of continual experimentation to try to get even more for less.If it’s the former then the marketeer has to step in quickly to provide the owner with data and easy-to-understand numbers about their reduced profit. If it’s the latter then it’s all part of the marketeer being tested by the business owner to prove their worth. Mathematically, the latter is OK provided the marketeer can quickly gather sufficient statistical data to demonstrate (in the shortest time possible) with high probability their optimised adwords analysis. Making sure the business owner is able to understand those numbers can often be a testing challenge when business owners are emotional/instinctive rather than analytical in the approach to business. This requires good communication skills at a level that is appropriate for the business owner. Showing numbers may not work while showing a simple graph or illustrative example may get the point across more effectively.Mathematically, this risk-taking stems from a miscalculation of risk versus reward. Personality tests can help distinguish those individuals most likely follow this route (see DOSPERT scale).A colleague of mine at INDEZ has suggested an alternative reason for ROI failures. His simpler suggestion is that some decision makers simply don’t have a good grasp of numbers. It’s not that they are stupid. Rather, it’s a deficiency like being colour blind or deaf. His view stemmed from a conversation he had with a business manager who completely failed to understand what a 400% ROI meant. A Google check shows that around 15 to 20% of the population suffer from Dyscalculia (think ‘dyslexia for numbers’). So, if up to a fifth of the population are rubbish at maths then a reasonable follow-on question is to ask how much of this deficiency is genetic and how much is down to schooling? The following graph suggests the latter to be the larger effect.

The final and only other logical explanation for failure to operate ROI is that the business simply does not have the cash flow to carry the gap between the Adwords payment and the realisation of the resulting profit. If that’s the case then the digital marketeer might well consider asking to get paid for their services in advance.

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