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ROI in Marketing – Understanding How To Report on Marketing Spend
Marketing Strategy, ROMI
Marketing no longer is an inexact science. Long gone are the large marketing budgets with no or little expectation for tangible evidence that the campaigns or events you are doing are actually showing positive results. It is becoming increasingly important that you, as the marketer, can prove a return on the investments from the marketing spend of activities you conduct throughout the year.
The biggest problem facing marketers when reporting on their marketing spend is to show actual ROI, a great difficulty when it comes to non-digital marketing campaigns or what were traditionally BTL (below-the-line) marketing activities such as events, activations, road shows or exhibitions. In order to adequately measure these, you need to ensure you have the right tools in place.
When speaking to corporate clients, I have often been faced with the problem of having to explain the returns that a certain event or campaign would or have had; adversely, many of our clients will understand the concept of ROI but incorrectly apply it to marketing. Marketing is generally seen as a cost centre to a business and thus is unlike any other investments a business makes. Instead of money being tied up in assets or inventories (capital expenditure or CAPEX), marketing spend is typically “chanced”. What I mean by that is that marketing spending is generally expensed in the current period and thus is operational in nature (OPEX). This differentiation in expenditure therefore also requires a dissimilar approach to ROI calculation.
Theoretically, any spend in marketing should be a cost to the business with a tangible expectation for returns. Practically, however, this is just as incorrect as applying the standard ROI calculation (return ÷ investment = positive or negative ratio) to marketing spend. The simple ROI is easy to do, but it is loaded with a pretty big assumption. The supposition is that the overall month-to-month growth in sales is directly ascribed to the marketing campaign in question. This is a fallacy. More precisely, it is due to the fact that large parts of what constitutes returns in marketing are not monetary, but rather intangible things such as brand awareness.
See what best works for you
Of course there are many forms of calculating ROI for marketing initiatives that you can use, depending on your circumstances.
- According to cost of goods sold (directly attributable to your campaign)
- Using Customer Lifetime Value (forecasting ROI)
- According to gross profit of goods sold (directly attributable to your campaign)
- ROMI or MROI – Return on Marketing Investment
- Simplified ROMI or Uplift/Cost
- ROAS – Return on Advertising Spend
- And many more…
Return on Marketing Investment
Although there are a host of different metrics that can be measured to calculate ROI in marketing, as showed above, I have found that the Return-on-Marketing-Investment (ROMI) is the most accurate way of showcasing actual returns on marketing, especially for BTL activities or marketing campaigns that are where you cannot directly attribute sales to the campaign (as is the case in most instances).
According to Daniel Kehrer, a group of marketing researchers in the US outlined three ways to look at ROMI, each with its place in your returns calculations. For you to align ROMI with actual business objectives, is the crux of making your calculations and subsequent strategic decisions work; a hurdle at which many marketers stumble. Calculating the ROMI without the relevant context of your business objectives would be a futile exercise.
Think of ROMI in two major parts. First, take short-term ROMI as your tangible, standard based ROI. It is the more simplistic index that measures your revenue spend, market share or other desired output metrics and is the easiest to calculate and interpret. Just the same as with ROI, budget spending will be considered as justified if the ROMI is positive. Commonly, the short-term approach to measuring ROMI utilises Marketing Mix Modelling techniques to detach the incremental sales effects from marketing investment.
Second, long-term ROMI further investigates the more intangible, long-term effect of your marketing spend in sales or other return metrics. For instance, it could be utilised to define the incremental value of marketing as it refers to increased brand awareness or future intent to purchase. As there are some contradictory versions of the formula out there, this is the one I find works best: ROMI = [incremental revenue (attributable to the marketing initiative) (R) x Contribution Margin (%) – Marketing Spending (R)] / Marketing Spending (R).
A required step in the calculation process is the measurement of the incremental sales attributed to marketing, not an estimation.
It is imperative that you as the marketer realise that ROMI is not a “one-size-fits-all concept”. Therefore you need to ensure that you clearly define how and what metrics you have used/measured in a specific business decision-making context in order to derive at your ROMI. Put differently, don’t utilise short-term, marketing channel-specific ROI as satisfactory for advising a long-term marketing budget or strategic business decision. It just simply is not. But, by ensuring that you define metrics clearly and isolate each campaign as best as you can from another, you should be able to at least get an inkling of the returns you are achieving.
Paul Ingram, co-founder and Managing Director here at Ideology, adds that he is a strong believer that returns are directly based on how much the original objectives set for the campaign or activity were achieved. Therefore, associated measurement tools now primarily need to define if what we spent on that campaign or activity, warrants the reaching or exceeding of the outlined objective – a value proposition.
