Case-let to explain the concept:
ABC Inc. client engagement Group is every now and again captivated; to help customers see how their showcasing exertions effect lead generation and sales. These solicitations come in numerous shapes and sizes yet have a tendency to coalesce around:
- Which media are “moving the needle” and at what spending levels?
- How do the different media work together?
- How can I improve targeting for my direct marketing efforts?
The first two questions are typically answered through what we call a Return on Marketing Investment (ROMI) analysis. The second question focuses on understanding customer behavioral pattern, predicting sales and devising marketing & online strategy.
What is a ROMI Analysis?
A Return on Marketing Investment (ROMI) analysis is fairly a new matrix, helps organizations understand the effectiveness of their marketing spending. A ROMI analysis examines business results in relation to specific marketing activity. Online marketing becoming the primary source of lead generation and sales it got to be even more critical to analyze and streamline their expense. The benefit of this knowledge is that it allows marketers to focus their spending on activities that provide the greatest return.
When would you use a ROMI Analysis?
The findings of ROMI analyses can help determine:
- Which marketing activities are generating substantial leads and which are redundant? E.g. single page flyers are not doing well now a days)
- Which are marketing areas providing substantial revenue at the same time required high level spending. Which required funds to be reallocated? E.g. for Warner bros. a particular movie required more funds in Europe than Asia for promotional activities.
- Which external market conditions (e.g. spending capacity of customer varies from city to city ) affect marketing’s ability to generate results? How does competitive activity impact the required level of marketing investment
- How should incremental funds be allocated?
A ROMI analysis, using statistical analysis / data mining tools and techniques, can uncover patterns about how and when customers purchase. This data might be exceptionally profitable in predicting sales and formulating relevant marketing strategies.
How Return on Marketing Investment (ROMI) is Different from Return on investment (ROI)
Return on marketing investment (ROMI) is the contribution attributable to marketing (net of marketing spending), divided by the marketing ‘invested’ or risked. It is not like the other ‘return-on-investment’ metrics because marketing is not the same kind of investment.
ROI vs ROMI
Return on investment (ROI) is a measure of the profit earned from each investment. It’s typically expressed as a percentage, so multiply your result by 100. In simple terms, the calculation is:
(Return – Investment) x 100 = _ %
ROI calculations for marketing campaigns (Return On Marketing Investment) can be complex — you may have many variables on both the profit (return) side and the investment (cost) side.The tricky part is determining what constitutes your “return,” and what is your true investment. For example, different marketers might consider the following for return:
- Total revenue generated for a campaign (the top line sales generated from the campaign)
- Gross profit, or a gross profit estimate, which is revenue minus the cost of goods to produce/deliver a product or service. Many organizations simply use the company’s COG percentage (30%) and deduct it from the total revenue.
- Net profit, which is gross profit minus expenses.
On the investment side, it’s easy for marketers to input the media costs as the investment. Other costs incurred to execute your campaign you should include:
- Creative costs
- Distribution costs (such as PAYG email credits)
- Printing costs
- Technical costs (such as email platforms, website coding, hosting etc)
- Management time
- Cost of sales
3 Common & Proven ROMI Formulas:
- Use gross profit for units sold in the campaign and the marketing investment for the campaign
- Gross Profit – Marketing/Investment Marketing Investment
- Use Customer Lifetime Value (CLV) instead of Gross Profit. CLV is a measure of the profit generated by a single customer or set of customers over their lifetime with your company
- Customer Lifetime Value – Marketing Investment/ Marketing Investment
- Profit – Marketing Investment – *Overhead Allocation – *Incremental Expenses/Marketing Investment