Over my last couple of posts we introduced return on marketing investment – ROMI – as a critical measure of marketing program effectiveness, and how treatment and control groups can be leveraged to directly measure incremental revenue contributions.
ROMI is a simple and magnificently pure ratio to help us objectively judge the productivity of any marketing spend. It’s kind of like a horsepower rating, answering the question “what is the output of this particular marketing motor?” The cornerstone in all of this is that we need a site-wide reference point at all times so we can measure increases or decreases in results in real-time – not before or after, but during the live campaign.
Now, we’ll turn our attention to a more formal definition of return on investment (ROI) and its components as it relates to marketing activities.
ROI is a measure of performance used to evaluate the efficiency of an investment. It is typically calculated by dividing the benefit of an investment by its costs as a percentage or ratio.
ROI = (Gain from investment – cost of investment) / Cost of investment
About soft benefits
In the marketing setting, the benefits can be tangible (directly measurable) and…less tangible (indirectly measurable). Incremental revenues and costs are directly measurable components of ROI and are a significant portion of “the gains” from any marketing program. We must also consider the additional values that an organization may accrue such as the value of any customer insights revealed, impacts to customer lifetime value (LTV), and brand equity.
As modern e-Commerce professionals, we all understand that generating useful customer insights is part and parcel for today’s digital marketing initiatives. The messages that customers respond to or fail to respond to can have a much wider impact than just improving conversion. For instance, knowing that users are converting more for an emphasized value proposition of “jumbo sizes” provides digital intelligence about user preferences and can be used to help generate better returns from demand generation investments.
Calculating dollar values for brand equity and customer lifetime value can require some complex modeling. Advanced math skills not withstanding, at a common sense level we all understand that marketing investments that cause existing customers to purchase more or more frequently, increase customer lifetime value and loyalty to our brand.
Using simple ROI and ROMI calculator
Let’s work through an example ROI analysis for an e-Commerce brand considering a new online marketing opportunity. The fields in yellow can be updated with your numbers (once you download the ROI calculator below ):
|Unique Visitors / month||$500,000.00|
|Conversion Rate (%)||2.00%|
|Average Order Value ($)||$125.00|
|Gross Margin (%)||35.00%|
|Gross Revenue ($ / Year)||$15,000,000.00|
|Net Revenue ($ / Year)||$5,250,000.00|
Furthermore, let’s assume that fully loaded cost of your marketing initiative is $6050.00 per month.
|Fully Loaded Cost||$6,050.00|
One way of analyzing if you should pursue your marketing investment is to determine the break-even point. Using the assumptions above, the break-even point is determined to be:
The number above is the % increase in revenues needed to have this marketing investment just pay for itself. This number can be translated into the total risk associated with this particular marketing investment.
A good marketing investment should be wholly justifiable from directly measurable revenue and profit impacts. Still, it’s important to try and assign some value to the less tangible benefits if we want a more balanced perspective.
The chart below represents the potential business results that can be achieved as result of the investment in the marketing initiative as well as the assumptions we are applying to this opportunity:
|Value Items||Assumptions||Gain ($ / Month)|
|Net Revenue (directly measurable)||5%||$21,875|
|Lifetime Value (LTV)||1%||$4,375|
Again, in the ROI calculator you can plug in values specific to your business.
Marketing Investment ROMI and ROI
Based on the numbers above the calculator will tell you what is the potential ROMI and ROI for your new marketing initiatives.
|Marketing Return on Investment|
Breakeven Point Analysis
Just to illustrate the point, the chart below shows how the % of incremental revenue required to breakeven on this investment goes down significantly as the online revenues go up:
The picture shows that for companies that have more than $25M in gross revenue that the breakeven point is less than 1%.
It is common rule of thumb that any marketing initiative that has ROMI larger than 10x should be high priority initiative. The following analysis shows that $6k per month investment has 10x ROMI for businesses that are $8M in gross revenue:
Incorporating marketing ROI into your playbook will win new allies in both the business and financial suites. And it will turn you into a strategic marketer who functions with financial rigor.