Return on marketing investment (ROMI) is a model for measuring the overall effectiveness of a marketing campaign. Another way of looking at ROMI is to consider it the return on a marginal investment in marketing.
Incremental revenue / Marketing spend
It’s basically a key performance indicator (KPI) for how much incremental revenue is produced for each additional $1 spent on marketing.
The desire for growth is fueling demand for marketing to produce ever more results. At the same time, CEOs and CFOs are demanding return on investment to secure budgets. Yet, a recent e-commerce benchmark study reported that size of the marketing budget was the most significant barrier to growth. There is no better way to go back to the well for more money than to use language that money people can understand.
How can you as a marketer demonstrate to the boardroom that you are a strategic investor who is managing your portfolio responsibly?
Using ROMI to manage and prioritize your marketing mix will prevent your stakeholders from ever thinking the oft-repeated phrase.
“Half of what I spend on marketing is wasted, I just don’t know which half,”
…and you will significantly raise your level of boardroom credibility.
ROMI is usually applied to online marketing and is extremely useful in helping marketers make better decisions about where to invest ever more scarce marketing dollars. It helps figure out how to prioritize the marketing mix so that the organization yields the best results. The rule of thumb for many companies is that 5x is a decent return and 10x is a serious winner.
Let’s look at an example. The cost of a new marketing program for the e-commerce website is $80,000, and we expect that investment to yield $1M of incremental revenue.
ROMI = $1,000,000 / $80,000 or 12.5X – a home run.
There are some challenges with ROMI. For one, the focus on incremental revenue generated only takes the short-term, directly measurable impact of marketing programs into account. While this isn’t necessarily bad, there are a number of other less direct values generated from marketing programs that are harder to measure directly such as brand awareness, loyalty, and advocacy. These less tangible benefits require more sophisticated modeling and analysis and are outside of the scope of this discussion.
Another shortcoming of ROMI is that it doesn’t take into account the cost of goods or services sold. If the focus on marketing is to drive more margin or gross profit then the calculation may be adjusted to take that into account. This brings the simple thumbnail of ROMI closer to traditional return on investment (ROI). Some recent research about e-commerce suggests that typical gross margins for online retailers are around 35%. If we were using the same example from above, our margin-based ROI would be:
ROI = ($1,000,000 * 35%) / $80,000 = 4.375x
*a very respectable ROI
You might ask what’s in this for me!
ROMI is a systematic and consistent way to prioritize, track and manage your marketing investments. When practiced and documented it can be become a cookbook for the available marketing levers that can be actuated to influence REAL business results.
But there is something more!
ROMI changes the way you think about marketing investments. It changes how your superiors, team members, and vendors perceive you. As you take on responsibility for delivering accountable results you will not only become a more strategic marketer, you will earn a seat in the boardroom.