Return on marketing investment

Return on marketing investment (ROMI) is the contribution attributable to marketing (net of marketing spending), divided by the marketing “invested” or risked. ROMI is a relatively new metric. It is not like the other “return-on-investment” metrics because marketing is not the same kind of investment. Instead of moneys that are "tied" up in plants and inventories, marketing funds are typically “risked.” Marketing spending is typically expensed in the current period. 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 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. [1]

The ROMI concept first came to prominence in the 1990s through the work of Gary Lilien and Philip Kotler in their encyclopedic book Marketing Models (1992) [2] and also Robert Shaw in Marketing Accountability (1997). [3]. 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) [4] and Marketing ROI by James Lenskold (2003) [5].


Contents

Purpose

The purpose of ROMI is to measure the degree to which spending on marketing contributes to profits. [1] Marketers are under more and more pressure to “show a return” on their activities.

Construction

Return on Marketing Investment (ROMI) =
[Incremental Revenue Attributable to Marketing ($) * Contribution Margin (%) - Marketing Spending ($)] /
Marketing Spending (S)

A necessary step in calculating ROMI is the estimation of the incremental sales attributable to marketing. These incremental sales can be “total” sales attributable to marketing or “marginal.” [1]

Methodologies

There are two forms of the Return on Marketing Investment (ROMI) metric.

  • short-term ROMI
  • long-term ROMI

Short term

The first, short-term ROMI, is also used as a simple index measuring the dollars of revenue (or market share, contribution margin or other desired outputs) for every dollar of marketing spend.

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 amount of incremental margin for each dollar of marketing spent is 3.0 (= 5.0 x 60%).

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 enough to help make important decisions to improve the entire marketing mix.

Long term

In a similar way the second ROMI concept, long-term ROMI can be used to determine other less tangible aspects of marketing effectiveness. 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.


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) .

Complications and cautions of measuring marketing effectiveness

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 (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 forward-thinking 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. [1] [6]

References

  1. ^ a b c d 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. ISBN 0137058292. 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: Marketing Activities and Metrics Project.
  2. ^ Lilien, G.L., Kotler, P. & Moorthy, K.S., Marketing Models, Prentice Hall, 1992. ISBN 0135619297
  3. ^ Shaw, R., Marketing Accountability, FT Reports, 1997, ISBN 1853348295
  4. ^ Powell, Guy R., Return on Marketing Investment: Demand More From Your Marketing And Sales Investments (2003) RPI Press. ISBN 0971859817
  5. ^ Lenskold, James, Marketing ROI: The Path to Campaign, Customer, and Corporate Profitability (2003) McGraw-Hill ISBN 0071413634
  6. ^ 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.
  • Schultz, Don E., Measuring Brand Communication ROI (1997) Assn of Natl Advertisers. ISBN 1563180537
  • Ambler, Tim., Marketing and the Bottom Line (2004) FT Press. ISBN 0273661949
  • Aspatore Books Staff, Improving Marketing ROI: Leading CMOs on Adding Value, Calculating Return on Investments, and Creating a Financial Impact (2006) Aspatore Books. ISBN 1596224347
  • Lilien, Gary L., Rangaswamy, Arvind, Marketing Engineering (2004) Trafford Publishing. ISBN 1412022525
  • Briggs, Rex, Stuart, Greg, What Sticks: Why most advertising fails and how to guarantee yours succeeds (2006) Kaplan Publishing ISBN 1-4195-8433-2
  • Kotler, Philip.; Kevin Lane Keller (2006). Marketing Management, 12th ed.. Pearson Prentice Hall. ISBN 0-13-145757-8
  • 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. ISBN 978-0470823958

See also


External links


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