The return on marketing investment- (ROMI) measures the efficiency of the marketing function. It’s used to assess the performance of the marketing function by measuring the change in the revenue with an increase in the marketing expenses. Effective marketing is expected to increase sales and direct the business on the horizon of exponential growth and long-lasting success. In other words, ROMI is to measure how much revenue a marketing campaign has generated compared to the cost for running the campaign. If a value added by a marketing campaign in the form of revenue/profit is higher than the cost incurred it’s said to be effective marketing and vice versa.
The effective marketing function is headed to connect time, energy, and advertising spends with the results that add to organizational development. On the other hand, ROMI helps to get an answer of the question “Is the marketing function effective and produces returns expected from them”
Different matrices are developed to assess the performance of the business operations. It helps to assess if the operations are effective and adding value. For instance, different ratios like profitability, liquidity, efficiency, and investment have been designed to identify and control the gaps within the financial system. Similarly. The ROMI is designed to measure the performance of the marketing function to assess if they have effectively performed.
Formula for calculating return on marketing investment
The formula for calculating return on marketing investment is as follow,
The formula takes an account of the additional sales generated by the business after deducting for the marketing expense.
The business had a marketing campaign in April and incurred a cost of USD 20,000. The additional sales in the month of April were USD 65,000. So, numerator is USD 45,000 (USD 65,000 – USD 20,000) and denominator is USD 20,000. So, (45,000/20,000) is 225% which is the return on marketing investment. It’s important to note that it’s not a profitability measure in any manner. It’s just focused on the effectiveness of the marketing function and the ability to drive revenue.
The given formula does not consider factors for the increase in sales other than marketing campaign while an increase of the sales may be due to other macro-economic factors. So, a detailed analysis needs to consider other factors as well.
Challenges in calculation of return on marketing investment
Since the input used in the calculation of return on marketing investment keeps changing its often difficult for the business to decide the period for which ROMI should be calculated. The period for the calculation may vary from a week to years. Further, some businesses consider an increase in gross revenue as value added by the marketing investment, some businesses consider an increase in the sales price, and even some businesses consider an increase in customer lifetime value. So, it’s a choice of the business. However, the business needs to remain consistent in the selection of their input. So, they can compare different marketing campaigns in terms of performance.
How companies use return on marketing investment
The companies use ROMI to assess which of the activities performed by the marketing function adds more value than others. For instance, direct marketing can be more effective in some businesses than mass marketing. It helps businesses to identify which way of marketing is the most effective.
What mistakes to avoid in for using return on marketing investment
The companies usually early call off the market campaign by looking at the negative ROMI. They assume the campaign has not been effective and the money is going to be wasted while this may not be always the case. The campaign may be effective and beneficial for the business in the long term.
In addition to this, there may be a problem in the benchmark of comparing ROMI. The responsiveness of the different markets and industries can be different. So, a ROMI can be different and the comparison of ROMI should be done with the same industry.
Hence, the business should consider an investment in marketing as some long-term activity and expect an increase in the brand value by a way of marketing.
Advantages of return on marketing investment
The method helps to develop an effective marketing strategy and identify if there is any deficiency in the marketing function of the business. If the business is able to find the problems in the marketing functions it can enhance its activities and ensure that activity adds certain value in the operations of the business.
It helps the business to understand a complete cycle of the marketing investment and an effective way that how to actually proceed ahead. It gives a route map to focus on the streams of advertisement that are effective for the business, focus on the business prospects of the overall organization, and helps to focus on the activities that add greater value to the business processes.
In other words, we can say the analysis of return on marketing investment helps the business in controlling the cost and ensuring that only performing activities remain part of the business.
Disadvantages of return on marketing investment
The method makes use of only the financial impacts of the marketing. It ignores the non-financial benefits obtained by the marketing campaign. The marketing campaign may not have increased in the revenue but an image of the business in the world. The existing customers of the business might have improved the brand image and satisfaction as a result of a marketing campaign which can be measured in the number and analyzed against cost incurred in the performance of the marketing campaign. So, the formula of the return on marketing investment ignores long terms added value for the business.
In addition to this, the formula of the return on marketing investment includes additional revenue from the period in which the marketing campaign has been carried out while the marketing campaign in a current period may actually produce results in the next accounting period. So, the formula may not provide accurate results and analysis.