Return on investment on marketing spend
One of the most significant concerns for marketers while conducting marketing campaigns is the return on investment. Often, an explanation on what the money is spent on a specific activity is needed. While there is no particular methodology for calculating ROI, marketers should consider many variables from both return and investment side. The trick is determining the components of return. The ultimate aim of any campaign is to earn profits. Given that a significant amount of money is considered as a cost of the investment, ROI is calculated and denoted as a percentage of return against the cost involved. Although determining the return is cumbersome, marketers can quickly calculate all the cost related to investment and categories it under different heads including
- Creative costs
- Print costs
- Technical costs including email platforms, coding, etc
- Management time, and
- Cost of sales
ROI calculation
Return on Investment has a simple formula for calculation. However, based on the nature and type of business, the formula is adapted to yield the most accurate percentage of return. The reason behind considering multiple factors is to justify the marketing investments made by the company. While the costs as mentioned earlier are the broad categories of which each investment can be included, defined expenses require the marketer’s explanation to be considered a part of the investment. Ideally, marketing ROI involves three broad components namely
- Total revenue
- Gross profit
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Net profit Depending on the campaign, three different methods can be used to determine the return on investment.
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Basic formula of using gross profit The most straightforward formula used to calculate return on investment is by calculating the percentage of net profit, that is calculated by deducting the marketing investment, against marketing investment. The formula is simple and easy to calculate.
Gross Profit - Marketing Investment
Marketing Investment
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Customer Lifetime Value based ROI Using customer lifetime value (CLV) involves more customer data. Instead of gross profit, marketers use CLV as a measure of profit. CLV is a long-term measure of profit from a single customer over their lifetime with the company.
Customer Lifetime Value - Marketing Investment
Marketing Investment
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Deducting overhead expenses to determine ROI Some companies deduct all costs incurred as part of the marketing campaign to determine the most accurate return on investment. This includes accounting overhead allocation or any other incremental expenses borne by the company at the time of the campaign. These expenses are usually sales expenses. However, some corporations account them in the ROI calculation to have a better understanding of their activities.
Profit - Marketing investment - Overhead allocation - Incremental expenses
Marketing Investment
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Return on Marketing Investment (ROMI)
A sub-sect of ROI, this new calculator attributes to understanding the returns from marketing investment. Named Return on Marketing Investment, it acts as a powerful tool for marketers. Return on Marketing Investment (ROMI) is a new-age term that has started to probe the performance of marketing campaigns conducted by companies. Marketing investment is different from direct investment as marketing funds are a risk based expenditure. These expenses are operational and account for a specific period. The need for ROMI increased as companies explored the world of marketing and considered the importance of promoting in the right channel. A survey of more than 200 marketing managers revealed the positive response for ROMI as managers find the data to be beneficial for their future strategic planning and execution.
Calculating ROMI involves three important components.
- Determining the incremental revenue attributable to marketing - Simply put, it is the amount of income the company earned by carrying out marketing activities. These activities can be both online and offline promotions.
- Contribution margin - Calculated regarding percentage, contribution margin amounts to the percentage of sales revenue the company generated through marketing. Higher margin implies marketing activities had a good and positive impact for the company.
- Marketing spending - The total amount of expenses company spent on creating marketing campaigns to increase sales and revenue. All costs about marketing including ad cost, website cost, and other promotion costs constitute as marketing spending.
Return on Marketing Investment (ROMI) is calculated as below
(Incremental revenue attributable to marketing * Contribution margin)- Marketing spending
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Marketing spending
Benefits of ROMI
Since all the expenditure towards marketing is mapped out, ROMI reaps the following benefits for management, marketers, and stakeholders.
- Justifiable marketing spend Every dollar spent toward marketing can be referred to with proper justification. Hence, the rate of lavish marketing spending is reduced as marketers need more than enough reason to give the management to invest in a platform.
- Spend planning With past data points, marketers can analyze which avenues perform well for the company and plan the marketing budget accordingly. The ability to leverage previous years’ or campaign metrics is the most prominent advantage for marketers to use ROMI.
- Competitor marketing efficiency Although ROMI is not public information, using financial statements of competitors can help companies know the position of their rivals and their performance. With this insight, marketers can realign their strategy to amp up their game.
- Accountability Marketers can be held accountable for both profits and losses incurred as a result of marketing activities as ROMI explicit states the metrics related to spendings. Since marketing is aimed at delivering customers and sales, management can understand the importance of marketing using ROMI. Owing to the usability of the formula, marketers capitalize the value to ascertain different parameters to study the performance of the company. Hence, ROMI has two methodologies that are used to capture various metrics. The two forms include short-term metric and long-term metric. Short term ROMI is used as a measure for tangible aspects of marketing including contribution margin. Long-term ROMI determines less visible elements of marketing effectiveness by assessing the marketing contribution toward brand awareness and other points.
Both the metric act as anchor points for various parameters including
- Customer lifetime value
- Customer acquisition rate
- Brand valuation
- Revenue per dollar
- Brand equity
