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Return on Marketing Investment

Introduction

There are two forms of ROMI first is short term and another is long term. The short term ROMI is used as a simple index measuring the rupee of revenue or market share and long term is used for tangible aspects of marketing effectiveness.

Marketing ROI is critical to any organization, especially business to business and smaller consumer companies. Without a significant return on marketing investment, the sales organization will not operate effectively, the company won’t meet its’ objectives.

The Formula

Return on Investment – ROI (%) = Net Profit (Rs) / Investment (Rs)

Or ROI = (Gross Margin – Investment) / Investment

The Gross Margin is the present value of incremental profits less cost of sale expenses. This represents the contribution made to the company’s profits prior to deducting the marketing investment. The Marketing Investment includes all the expenses that are put at risk, to market the product or service. This includes campaign development and media, as well as staff time allocated to managing the project. It does not include additional discounts or gifts – this is a cost of sale.

Key Things to Understand

• ROI should be a positive number and expressed as a percentage. A positive percentage is a financial gain, a negative percentage a financial loss and 0 is breakeven. A hurdle rate greater than your cost of capital should be set. Ask your finance team to help.
• Return should be based on the Gross Margin Contribution – not Revenue.
• It should include a reasonable estimate of Incremental Customer Value (ICV) – this is the subsequent sales the customer will make as a result of the initial purchase. Note though this is not Customer Lifetime Value – Lifetime value requires further reinvestment from future marketing investments – so using CLV will overstate the return.
• Don’t include any costs of sales in the investment – discounts, vouchers, incentives are a COS not investment. That is you incur the cost with the sale not with the generation of the marketing program. Typically variable costs are COS and fixed costs are an investment.

Other Considerations Long term Versus Short term activity.

One thing you obviously need to do is build long-term brand equity. You’re going to do this through brand building, awareness advertising, or building associations through sponsorship for example, while these activities will result in sales they are not designed to drive immediate sales. As a result it is not realistic to measure results against these tough ROI measures. Brand communications should be considered an overhead expense and managed using long-term brand equity valuations. Considering this, obviously a judgment needs to be made in terms of what proportion of your marketing budget you can afford to allocate to brand building.

Bankable success versus innovation.

Like a lot of things in business you are always looking to improve your success, while at the same time you do recycle those methods that are tried and true. From a marketing point of view while there is always a desire to be innovative you need to balance that with the risk of a complete campaign failure. To manage this it’s important to set a portion of your budget aside for innovation and experimentation so you can learn and improve your results. However the trick is to not set this too high that it might adversely affect your annual results should it fail.

 

Campaign Measurements

 

Different styles of communication have different levels of measurability. Brand advertising is of course more difficult. With traditional above the line media it’s possible to measure some of the impact, but not perfect. Direct Marketing is easy to measure and Online Marketing offers the ultimate in measurability. Looking specifically at traditional media; TV, Press, Radio, Billboards. While this is difficult to measure you can build mechanisms into your advertising to do this. Ideas you can explore are;

• Different  numbers
• Different URLs
• Specific Coupons/Offers
• Txt for info
• Website/retail questioning – how did you hear about this offer?

 

Usage of MOR I Coefficients

Using ROMI Coefficients

• A marketing mix model will define the potential uplift from increasing spend on particular media or campaign types
• This can be used to forecast the impact of budget changes
• For example, the model may forecast that for every $1 we spend on online advertising, we expect to get $10 of revenue
• We may be able to further refine that to say that every incremental $1 spent on billboards will generate 45% ROI, but with diminishing returns after $1 million
• Marketing-mix models typically results in coefficients, such as incremental revenue per gross rating point (GRP), or incremental revenue per impression.
• These must then be converted into ROMI indices for revenue or margin, and ultimately marketing ROI to explain to the CEO and CFO current performance and future improvements.

The Marketing effectiveness optimization by IBM an example

Service detail

Marketing investment optimization applies data analytics to uncover opportunities to maximize the impact of marketing spend by companies in their promotional activities.

Highlights

IBM provides companies with a new level of sophistication in managing their marketing budgets with the goal of ensuring an investment approach that maximizes the revenue and profit yield per dollar spent over a discrete time horizon.

Customer Equity Lifetime Management Solution uses a ‘financial’ investment-based approach to forecast, plan, and budget marketing activities, based on a scientific framework of leading-edge algorithms. It leverages data and tools from existing marketing information and decision systems, such as Siebel, SAS, Epiphany, etc. Read more below.

IBM research indicates that only 30 percent of companies regard their CRM investments as successful. Furthermore, the investment made by many companies in marketing activities is key components of their overall SG&A spend. However, most of these companies cannot effectively measure the return on investment they receive in terms of increased sales or revenue. Areas such as mass media and education promotions continue to remain “blind faith” investments.

 

 

The ineffectiveness of many of these programs can be attributed to:

 

• The inability to develop a single view of the customer
• A lack of business processes and technology solutions to effectively coordinate customer-focused activities at every customer touch point
• The inability to provide customers with a consistent, value-enriched experience across channels
• The tendency to take a reactive approach to customer information, rather than leveraging it to deepen customer insight and build loyalty
• Customer segmentation, transaction/purchase pattern analyses and churns predictions that do not provide an understanding of the actions and sequences to optimize customer value within the marketing budget and risk constraints.

Marketing managers need an enhanced level of business insight to control marketing spend while increasing customer value? The Marketing Investment Optimization solution set provides a more sophisticated segmentation and targeting strategy that help to improve ROI using advanced analytic tools and techniques.

 

Introducing marketing event optimization

 

Marketing event optimization examines a company’s proposed direct marketing events over a given time period — such as mailings, telemarketing campaigns, e-mail marketing — and builds an optimal promotional stream that helps maximize overall financial results, while reducing costs and avoiding customer saturation. Utilizing advanced analytics, the solution develops a contact plan by customer based on marketer-defined resource constraints, which include:

 

• Expected returns

• Individual customer budget

• Event cost

• Promotional interaction between events

• Minimum and maximum offers per event

• Overall marketing budget.

 

Purchase history, demographics and aggregate patterns of predicted behaviors are used to calculate each Customer’s “risk/return” relationship so that an optimal set of events can be directed at the customer up until the point of diminishing returns. Risk is defined, for instance, as the act of mailing a promotion to a customer given the return on that particular mailing may be zero. Marketers can see the impact of various optimization scenarios, determine the “best” investment strategy, and then capture results to continually refine and adjust their contact strategy for each customer under consideration. 

 

 

Approaching customers as an investment

 

 

Marketing event optimization is based on IBM’s horizontal marketing methodology, which views customers as a portfolio of financial instruments to be invested in over time, much the same way financial advisors manage their clients’ assets. Why spend your entire budget on your best customers, if the same or less budget, when better directed, provides the opportunity to yield more profitable results? Horizontal marketing shifts the focus from optimizing events to optimizing customer relationships by advocating a more balanced spending approach — one which does not:

 

1. Over invest in the “best” customers

2. Under invest in “underperforming” customers

3. Ignore “rising stars.”

 

 

The right offer at the right time

 

 

Marketing event optimization helps bring an entirely new level of sophistication to the way marketing departments Plan and manage their direct marketing activities. What’s more, the solution is designed to interface with a number of third-party tools and databases, allowing the analysis and reporting of results to flow seamlessly into a client’s

existing environment. IBM is ready to work with organization to integrate marketing event optimization into your marketing process flow.

 

References

1. Kotler, Philip. Kevin Lane Keller (2006). Marketing Management, 12th ed. Pearson Prentice Hall.
2. Lilien, Gary L., Rangaswamy, Arvind, Marketing Engineering (2004) Trafford Publishing.

Internet Sources

1. http://www.economywatch.com/marketing/romi-return-on-marketing-investment.html
2.   whatis.techtarget.com/return-on-marketing-investment–romi-.html

 

About the Author

Kotler 2008 brand management

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