Return on marketing investment ( ROMI), or marketing return on investment ( MROI), is the contribution to profit attributable to marketing (net of marketing spending), divided by the marketing 'invested' or risked. ROMI is not like the other 'return-on-investment' (ROI) metrics because marketing is not the same kind of investment. Instead of money that is 'tied' up in plants and inventories (often considered capital expenditure or CAPEX), marketing funds are typically 'risked'. Marketing spending is typically expensed in the current period (operational expenditure or OPEX).
The idea of measuring the market's response in terms of sales and profits is not new, but terms such as marketing ROI and ROMI are used more frequently now than in past periods. Usually, marketing spending will be deemed 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.Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. . The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language in Marketing Project.
The purpose of ROMI is to measure the degree to which spending on marketing contributes to profits. Marketers are under more and more pressure to "show a return" on their activities.
History
Construction
- Return on Marketing Investment (ROMI) =
- Incremental /
- Marketing Spending ($)
A necessary step in calculating ROMI is the measurement and eventual estimation of the incremental sales attributed to marketing. These incremental sales can be 'total' sales attributable to marketing or 'marginal.'
Methodologies
Short term
For example, if a company spends $100,000 on a direct mail piece and it delivers $500,000 in incremental revenue, then the ROMI factor is 5.0. If the incremental contribution margin for that $500,000 in revenue is 60%, then the margin ROMI (the incremental margin for $100,000 of marketing spent) is $300,000 (= $500,000 x 60%). Of which, the $100,000 spent on direct mail advertising will be subtracted and the difference will be divided by the same $100,000. Every dollar expended in direct mail advertising translates to an additional $2 on the company's bottom line.
The value of the first ROMI is in its simplicity. In most cases a simple determination of revenue per dollar spent for each marketing activity can be sufficient 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 to separate out the incremental sales effects of marketing investment.
Long term
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. CLV has been used as input to ROMI calculations in some academic works.
Long term ROMI models have sometimes used brand valuation techniques to measure how building a brand with marketing spend can create balance sheet value for brands (or at least for brands that have been transacted, and therefore under accounting rules can have a balance sheet value). The ISO 10668 standard sets out the appropriate process of valuing brands and sets out six key requirements, transparency, validity, reliability, sufficiency, objectivity and financial, behavioural and legal parameters. Brand valuation is distinguished from brand equity by placing a money value on a brand, and in this way a ROMI can be calculated.
Note: No return on marketing investment methodologies have been independently audited by the Marketing Accountability Standards Board (MASB) according to MMAP (Marketing Metric Audit Protocol) .
Cautions
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 (e.g., incremental revenue, brand awareness or brand equity). With this knowledge, marketing investments can be redirected away from under-performing activities to better performing marketing media.
Long-term ROMI is often criticized as a "silo-in-the-making"—it is intensively data driven and creates a challenge for firms that are not used to working business analytics into the marketing analytics that typically determine resource allocation decisions. Long-term ROMI, however, is a sophisticated measure used by a number of firms interested in getting to the bottom of value for money challenges often posed by competing brand managers.
However, it is 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. 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 and the focus should be on whether it is a necessary expense. Marketers believe that many of their activities generate lasting results and therefore should be considered 'investments' in the future of the business."Hawkins, Del I., Roger J. Best, and Charles M. Lillis. (1987). “The Nature and Measurement of Marketing Productivity in Consumer Durables Industries: A Firm Level Analysis,” Journal of the Academy of Marketing Science, 1(4), 1–8.
ROMI in Digital
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 may be for their campaigns, before they even start investing.
Based from statistical research, and all things being equal, the business owner can calculate their current Digital Marketing ROI via their website and web analytics software to understand their :
- Current Traffic
- Conversion Rate and
- Average Sale.
Add in readily available information on potential traffic from the Google Keyword Tool, and surveyed costs to acquire that traffic, the business owner or marketer can estimate the potential ROI if that traffic is acquired, and even measure it against other marketing methods.
See also
- Demand chain
- Marketing
- Marketing Strategy
- Marketing Mix
- Marketing Management
- Marketing Mix Modeling
- Marketing Plan
- Strategic Management
- Strategic Planning
- Marketing Effectiveness
Sources
- Schultz, Don E., Measuring Brand Communication ROI (1997) Assn of Natl Advertisers.
- Ambler, Tim., Marketing and the Bottom Line (2004) FT Press.
- Aspatore Books Staff, Improving Marketing ROI: Leading CMOs on Adding Value, Calculating Return on Investments, and Creating a Financial Impact (2006) Aspatore Books.
- Lilien, Gary L., Rangaswamy, Arvind, Marketing Engineering (2004) Trafford Publishing.
- Briggs, Rex, Stuart, Greg, What Sticks: Why most advertising fails and how to guarantee yours succeeds (2006) Kaplan Publishing
- Kotler, Philip.; Kevin Lane Keller (2006). Marketing Management, 12th ed.. Pearson Prentice Hall.
- Sexsmith, Joseph R. "A Fresh Start: Improving Marcom Effectiveness" (2006) New Paradigm Learning Corporation
- Powell, Guy R., Marketing Calculator: Measure and manage your return on marketing investment (2008) John Wiley and Sons.
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