How to Calculate Return on Marketing Investment (ROMI)
Return on Marketing Investment is the tool that we use to calculate the profit that the company can generate from its marketing campaign. It is the contribution which raises due to advertising campaign.
The company runs a marketing campaign to increase sales. However, not all marketing will make the same return. It differs due to the nature of advertising, budget size, product, and many other factors. It is very important for the company to access the performance of marketing campaigns.
Return on marketing investment equals sale growth less marketing cost and divide by the cost itself. ROMI is a method that evaluate the effectiveness of marketing by comparing return and cost. The company may run multiple campaigns at the same time. They will increase the budget for a high return campaign. If any advertising method does not work well, they will try to modify or even stop it to save the budget.
Marketing is the method that the company uses to acquire new customers and increase sales. If we wan to expand our business and increase sales, we must spend more on marketing expenses. However, it is not simple as it sounds, there are many kinds of marketing strategy which we can use. They have a different impact on the business strategy, so the company has to test and evaluate its return before scaling up any campaign.
Not all marketing campaigns are aiming to increase sales. The company may want to increase the brand awareness of the new product to the market. So it is not necessary to calculate the return on marketing investment. It is almost impossible to differentiate normal revenue from the one from marketing investment.
Example of ROMI
Company ABC is running a new marketing campaign this month, which cost around $ 50,000. During the month, the company can generate a sale of $ 200,000 compared to the prior month that has only $ 100,000. So we can see that the campaign has brought the sale of $100,000 to the company. So what is the return on marketing investment?
ROMI = ($ 100,000-$ 50,000) /$ 50,000 = 100%
We can see that the marketing campaign has increased sales 100%, but how do we know that this sales increase is the result form marketing. What if we do not promote, but our product still increases due to its life cycle and other factors. We cannot tell the exact relationship between sale marketing expenses.
Moreover, if we can increase the sale of $ 100,000 by spending $ 50,000 in marketing, so how much will we get if we double or triple the marketing budget. If we expect to increase sales by $200,000 by increasing the marketing budget to $100,000, it will not go that way. There are many factors that will impact the sale amount.
Return on marketing investment for online advertisement
During this new technology era, most of the marketers are promoting their products on the internet and social media such as Facebook, Instagram, and so on. ROMI plays a very important role in an effective marketing campaign.
The company may run the advertisement through Facebook, Google Ads, and others. It is very important to control the return from each campaign. Online advertising allows the company to customer so many variables such as geography, age, interest, and so on.
The company needs to run many campaigns with a variety of factors, and let them run for some time before increasing the budget.
After getting the results, company may increase the high return campaign and stop lower return ads. So they will be able to maximize the return on marketing investment as well as profit.
How to increase Return on Existing Campaign?
Consider both short term and long term impact
Different marketing campaigns have a different time frame, so we should consider all impacts. Sometimes it requires long-term to take effect and it will be a problem when we shut down before it reaches its full potential.
Management should take a close look before ending any significant advertisement campaign. They need to see its full potential before shutting it down. As mentioned, some advertisements are not meant to increase revenue immediately. They just bring brand awareness to the market.
Balance Cost and Benefit
We usually have limited funds, so it is good to focus on profitable marketing which will generate sales in the meantime. Any long term will require huge investment and will not make any sale at the current time.
Management must carefully review the budget plan for both long-term and short-term.
Both marketing budgets must be balanced otherwise it will be a problem for company. Lack of short term plan will lower the revenue for the company while management focuses on long-term marketing. The company may be bankrupt before the long-term marketing strategy can increase the revenue.
Lack of a long-term marketing strategy will not allow the company to grow substantially. Management may focus on short-term profit and ignore future growth.
The company should start small to test the market and customers. When we have some data and more confidence in our campaign, it is a good time to scale up to maximize the profit. It is very risky to put all the money into a marketing campaign that we are not sure about.
What is the challenge in ROMI?
The ROMI formula is very straight forward and looks easy to define. However, in real practice, it is another story.
First, it is not easy to differentiate the sale generated from the marketing campaign from the normal sale. Most companies will compare the sale before and after the marketing promotion. However, it still subjective as there is not an exact reason as the product may reach its peak even the advertisement does not take place.
Second, it is very challenging to calculate marketing cost, especially the staff cost. The marketing department may work for several campaigns at a time, so it is tough to allocate their cost to each one.
Third, the company head of marketing will require to spend time analyzing each marketing campaigns. It would be better if he spends time on technical skills and initiates new ideas for products and companies.