Return on marketing investment

Return on marketing investment (ROMI) 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 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 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.

Contents
History
Construction
Methodologies
Short term
Long term
Cautions
ROMI across mediums
See also
References
Sources

History
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) [2]
and Marketing ROI by James Lenskold (2003).[3] 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.[4]

Construction
Return on Marketing Investment (ROMI) =
[Incremental Revenue Attributable to Marketing ($) * Contribution Margin (%) - Marketing
Spending ($)] /
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.' [1]

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

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 spent.

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
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.

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.

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
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 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][5]

ROMI across mediums

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.[6] In 2013, Black Ink introduced Eye On, the first SaaS
designed to measure enterprise ROMI across all mediums. [7]

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. [8]

See also
Demand chain
Marketing
Marketing Strategy
Marketing Mix
Marketing Management
Marketing Mix Modeling
Marketing Plan
Strategic Management
Strategic Planning
 Marketing Effectiveness

References
1. 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 0-
13-705829-2. 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 (http://www.commonlanguage.wikispaces.net/).
2. Powell, Guy R., Return on Marketing Investment: Demand More From Your Marketing And Sales Investments
(2003) RPI Press. ISBN 0-9718598-1-7
3. Lenskold, James, Marketing ROI: The Path to Campaign, Customer, and Corporate Profitability (2003) McGraw-
Hill ISBN 0-07-141363-4
4. 2006 What Sticks, Kaplan ISBN 1-4195-8433-2
5. 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.
6. Marchionda, Michael. "Technologies for Measuring Return on Marketing Investment (ROMI)" (https://web.archive.
org/web/20140329005944/http://www.marketingautomationnation.com/study/survey/). Marketing Automation
Nation. Ryerson University. Archived from the original (http://www.marketingautomationnation.com/study/survey/)
on 29 March 2014. Retrieved 28 March 2014.
7. "Archived copy" (https://web.archive.org/web/20140531172532/http://blackinkroi.com/benefits/). Archived from
the original (http://blackinkroi.com/benefits/) on 2014-05-31. Retrieved 2014-06-09.
8. "Archived copy" (https://web.archive.org/web/20150106085802/http://www.twotreesmarketing.com/digitalmarketin
groi/). Archived from the original (http://www.twotreesmarketing.com/digitalmarketingroi/) on 2015-01-06.
Retrieved 2015-01-07.

Sources
Schultz, Don E., Measuring Brand Communication ROI (1997) Assn of Natl Advertisers. ISBN 1-56318-053-7
Ambler, Tim., Marketing and the Bottom Line (2004) FT Press. ISBN 0-273-66194-9
Aspatore Books Staff, Improving Marketing ROI: Leading CMOs on Adding Value, Calculating Return on
Investments, and Creating a Financial Impact (2006) Aspatore Books. ISBN 1-59622-434-7
Lilien, Gary L., Rangaswamy, Arvind, Marketing Engineering (2004) Trafford Publishing. ISBN 1-4120-2252-5
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 978-0-470-82395-8

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