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16 Oct 2008, Posted by Matthew Reinbold in New Work Ways,Thought & Theory, 3 Comments

Next 6-9 Months: ROI Under a Microscope


ROI is the common business acronym for Return On Investment (no, developers do not have the market cornered when it comes to abbreviated slang). It is the ratio of money made during an endeavor to the money spent. It is a useful tool in comparing opportunities. Selling unicorns may have an extremely large amount of revenue but the cost to acquire one makes the return on investment worse than, say, a lemon aid stand. ROI often becomes secondary when money is abundant – why choose from multiple ways of making money when there’s enough to try it all? For the past several years, in what has been referred to as the ‘Web 2.0′ era goals for audience size, stickiness,reach, subscriber growth, and even the vague “viral-ness” have superseded ROI.

Now, however, decreased profits from reduced demand and the inability to acquire credit means all businesses will put

ROI Under a Microscope
What This Means

  1. Companies will be going through their books and eliminating staff who’s potential revenue for work produced divided by their cost of keeping around is lowest. Within the last week there have been layoffs at Zillow, Pandora, Zivity, AdBrite, Hi5, Jive Software, and Redfin. Podango (a podcasting company with Utah ties) is looking to liquidate its San Francisco production studio. Previously there were the layoffs at Seesmic and eBay. Further, Yahoo is rumored to be laying off several thousand this December. More can be found on TechCrunch’s Layoff Tracker. Even for companies with sound capitalization and dependable revenue flow the downturn provides convenient cover to get rid of dead weight [note the comment toward the end of that article about how "superstars tend to stay" - its precisely because their ROI is higher than their co-workers].

  2. Marketing, already an industry in transition, will accelerate its online spending. Closely correlated, one way media such as radio, television, and newspapers will be devastated. As previously noted here things for “traditional media” haven’t been rosy. This year the bleeding has been stemmed by two notable anomalies – the unprecedented drama at the Olympic Games (Phelps, Usain Bolt) and record setting political spending (see the graph to the right). With nothing primed to pour money into conventional advertising in 2009 and an inability to easily demonstrate ROI like web outlets, conventional media’s outlook is dire:

    “The smell of fear is incredible. People are terrified,” said Martin Sorrell, chief executive of WPP, at a recent conference.

  3. Even with the measurability of online advertising companies will likely reduce spending on unproven new media programs – that is, lessening spending for which the ROI hasn’t been proven:

    The Wall Street Journal reported today that spending on new media will be slowing…this is significant in that it was a market poised for significant growth. Many companies were starting to jump into the fray and experimenting on advertising on networks like Facebook and MySpace, mobile programs (integrated texting into larger campaigns for example) or even spending marketing dollars advertising in video games.

    While efforts deemed ‘social media’ are low cost they are often also time intensive. The ROI of the time taken may make even proven initiatives less attractive than other alternatives.

What You Can Do About It

  1. If you have a salaried position with a company you need to make your self indispensable sooner rather than later. If you are a freelance services provider expect your invoices to get extremely detailed. Companies will be seeking as much detail as possible as to where their money is going. And the only thing worse than a poor ROI is the lack of detail to make a decision.
  2. In addition to providing copious records to your clients you will also need to be doing your own analysis. Not only does the time spent per client verses the amount paid need to be considered. There are time costs associated with acquiring and maintaining client relationships. Tim Ferris, author of the 4 Hour Workweek closely follows the 80/20 rule:

    Ferris suggests that we begin to eliminate those items that fall into the 80% rather than the 20%. If you have 80% of your projects that are truly underperforming yet still taking up 80% of your time, get rid of them so that the time can be used for other purposes.

    If you have client work that is paying but who’s ROI is less than other alternatives it may be time for a change.

  3. Be extremely wary if you’re sole means of income is advertising. While the measurability of available metrics will pull additional dollars online they will go toward safe bets (the 800lb gorillas with a track record). The increased spending will not necessary trickle down the long tail. This is dire for a slew of Web 2.0 plays. If your Internet site or service does not have an alternative to Google Adsense for revenue it is time to find one yesterday – whether freemium or something else this should be your entire focus.

What’s Next: