Return On Marketing Investment (ROMI) is the contribution to profit attributable to marketing (net of marketing spending). Then again, divided by the marketing ‘invested’ or risked. ROMI is unlike ‘Return On Investment‘ (in short ROI) metrics because marketing is not the same kind of investment.
For instance, instead of money that is ‘tied’ up in plants and inventories (often considered capital expenditure or CAPEX), marketing funds are typically ‘risked’. Meaning, marketing spending is typically expensed in the current period (operational expenditure or OPEX).
The ROMI concept first came to prominence in the 1990s. The phrase “return on marketing investment” became more widespread in the next decade. Following the publication of two books Return on Marketing Investment by Guy Powell (2002) and Marketing ROI by James Lenskold (2003).
In the book “What Sticks: Why Advertising Fails And How To Guarantee Yours Succeeds,” Rex Briggs suggested the term “ROMO” for Return-On-Marketing-Objective, to reflect the idea that marketing campaigns may have a range of objectives, where the return is not immediate sales or profits.
For example, a marketing campaign may aim to change the perception of a brand.
What is Return on Marketing Investment?
Return on Marketing Investment is a metric used in online marketing to measure the effectiveness of a marketing campaign. It examines results in relation to the specific marketing objective. ROMI is a subcategory of return on investment or ROI because here the cost is incurred on marketing.
Marketing a product could be expensive across various avenues available such as a website, social media, print, magazines, or hoardings. That’s why, to gauge the effectiveness of the marketing campaign, companies resort to ROMI.
How carefully you define sales and costs can be important in determining your true return on marketing investment. Particularly, depending on which numbers you include in the calculation.
How do you calculate ROMI?
In simple terms, ROMI is a calculation of total revenues against marketing investment. It should only reflect the direct impact of a marketing campaign. For ROMI to be effective, it is important for the campaign to have some measured metrics.
That in mind, the basic formula for calculating return on marketing investment (ROMI) is: [[sales-costs]/marketing-costs]. Whereby,
- Sales: Revenue generated from marketing activity recorded as sales to customers, and
- Costs: This is the cost of generating sales on sold goods (or COGS) and the costs of marketing.
[Total sales/marketing campaign costs]
This is the simplest way to calculate ROMI. You add up all the sales made in a period, say Q1, and divide that sales revenue by your marketing spends in the corresponding Q1 period.
So let’s say you generate £500k in revenue and you have campaign costs of £100k. In this scenario, your ROMI is £500k / £100k = 5 which is also 500%.
[Total sales-COGS/marketing campaign costs]
In this scenario, we remove the cost of goods sold (COGS) from the revenue. So let’s say you generate £500k in sales. But the production cost of the sold product was £250k.
Now the ROI calculation becomes £250k / £100k = 2.5
[Total sales-COGS/total marketing costs]
In this scenario, we calculate revenue as sales-COGS (as in point 2 above), but we include total marketing costs – these can be the costs of all the assets generated plus any agency fees.
So let’s say your sales revenue is £250k (£500k-£250k), but your total marketing costs for the period are:
- Campaign costs – £100k
- Origination costs (e.g. photography, licensing, DM postage, etc) – £25k
- Agency fees – £25k
- Freelancers for internal fulfillment artwork – £20k
A necessary step in calculating ROMI is the measurement and eventual estimation. Particularly of the incremental sales attributed to marketing. These incremental sales can be ‘total’ sales attributable to marketing or ‘marginal.
In a real sense, there are two forms of metrics that you can use. And they include short term and long term metric forms as discussed below;
A. Short Term Metric Form
The first, short-term ROMI, is also used as a simple index measuring the dollars of revenue. Or even the market share, contributions margin, and any other desired outputs for every dollar of marketing spent.
Specifically, the value of the first ROMI is in its simplicity. And in most cases, a simple determination of revenue per dollar spent for each marketing activity can be very sufficient. In order to help make important decisions to improve the entire marketing mix.
The most common short term approach to measuring ROMI is by applying marketing mix modeling techniques. Allowing businesses to separate out the incremental sales effects of marketing investment.
B. Long Term Metric Forms
In a similar way, a long-term ROMI is used to determine other less tangible but effective marketing aspects. For example, ROMI could be used to determine the incremental value of marketing as it pertains to increased brand awareness, consideration, or purchase intent.
In this way, both the longer-term value of marketing activities (incremental brand awareness, etc.) and the shorter-term revenue and profit can be determined. This is a sophisticated metric that balances marketing and business analytics.
And is used increasingly by many of the world’s leading organizations (Hewlett-Packard and Procter & Gamble to name two) to measure the economic (that is, cash-flow derived) benefits created by marketing investments. For many other organizations, this method offers a way to prioritize investments and allocate marketing and other resources on a formalized basis.
Long term ROMI models will often draw on Customer Lifetime Value models to demonstrate the long term value of incremental customer acquisition or reduced churn rate. Some more sophisticated Marketing Mix Modeling approaches include multi-year long term ROMI by including CLV type analysis.
Is the Return on Marketing Investment useful?
The purpose of ROMI is to measure the degree to which spending on marketing contributes to profits. Eventually, each day, marketers are under more and more pressure to “show a return” on their activities. Moreover, the idea of measuring the market’s response in terms of sales and profits is not new.
Usually, marketing spending will be deemed as justified if the ROMI is positive. In a survey of nearly 200 senior marketing managers, nearly half responded that they found the ROMI metric very useful.
In addition, Return on Marketing Investment (ROMI) is a tool that will help marketers to understand marketing programs, plans and manage their budgeting. As well as, communicate the aim and the intention from marketing programs, manage priority, execute and bring off its, monitors and measurements.
In other words, ROMI provides knowledge to know when marketers will invest more or even reduce investment. Equally important, ROMI shows the level of success of marketing activities carried out and will make marketers more successful. At the end, which will be able to change the company’s finances for the better.
The main tools to utilize in ROMI
Direct measures of the short-term variant of ROMI are often criticized as only including the direct impact of marketing activities. Without including the long-term brand-building value of any communication inserted into the market.
Short-term ROMI is best employed as a tool to determine marketing effectiveness to help steer investments from less productive activities to those that are more productive. It is a simple tool to gauge the success of measurable marketing activities against various marketing objectives. For example, incremental revenue, brand awareness, or brand equity.
Long-term ROMI is often criticized as a “silo-in-the-making.” Meaning, it is intensively data-driven and creates a challenge for firms. Especially, that are not used to working business analytics into the marketing analytics that typically determines resource allocation decisions.
What are the Cons of Return on Marketing Investment?
It’s important to realize, the difficulty of measuring ROMI varies across mediums. Results of a recent North American survey show the ROI associated with one-way, traditional media (e.g. television and radio) is more difficult to measure. Than interactive, web-based digital media such as permission-based email marketing or social media marketing.
In 2013, Black Ink introduced Eye On, the first SaaS designed to measure enterprise ROMI across all mediums. With the rise in digital marketing, the opportunity is available for marketers, or even business owners to run rough calculations of what their approximate ROI maybe for their campaigns before they even start investing.
However, based on statistical research, and all things being equal, business owners can calculate their current ROI through their web analytics software like Google Analytics. In the end, this helps them to better understand their: current traffic, conversion rate, and average sales.
Surprisingly, business owners or marketers can estimate the potential ROI if that traffic is acquired. And even measure it against other marketing methods. They can use the readily available information on potential traffic from the Google keyword planner tool, and survey costs to acquire that traffic.
It’s often unclear exactly what it means to ‘show a return’ on marketing investment. Certainly, marketing spending is not an ‘investment’ in the usual sense of the word. For one thing, there is usually no tangible asset. And often not even a predictable (quantifiable) result to show for the spending.
But, marketers still want to emphasize that their activities contribute to financial health. Some might argue that marketing should be considered an expense. Whereby, the focus should be on whether it is a necessary expense.
On the other hand, marketers believe that many of their activities generate lasting results. And, therefore, should be considered ‘investments’ in the future of the business. Below are more useful and related topic links;
- Online Digital Marketing | How Do You Get Started?
- Paid Search | A Beginners Guide In Online Marketing
- Digital Marketing Channels Every Business Needs Online
- Website Conversion Rate | Best tools for online marketers
- Lead Generation | How Do I Increase Online Conversions?
Finally, I hope the above guide was useful in your preparation for your brand, business, or even product marketing campaigns. However, if you’ll have additional information, contributions, or even suggestions that demand our attention, please Contact Us.
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