ROMI - Return On Marketing Investment

By: EconomyWatch   Date: 29 June 2010

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ROMI or Return On Marketing Investment is a derivative of the ROI or Return on Investment formula, that seeks to specifically derive the value of marketing budgets - according to Singapore interactive agency Qais Consulting.

To understand ROMI, then, we should first refresh our memories on the ROI formula.

 

Metric: Return on Investment (ROI)

The Question:

How much profit have I generated from an investment?

Approach:

Net profit divided by invested capital

Commentary:

The default metric for speaking to CEOs and CFOs. However it is hard to explain long-term benefits, particularly when justifying brand uplift. ABC or similar needed to fully calculate Net Profit. May also need to calculate NPV

The Formula:

Return On Investment - ROI(%)= Net Profit ($) / Investment ($)

 

Metric: Return on Marketing Investment (ROMI) - Short Form

The Question:

How much return have I generated from my marketing investments?

Approach:

Total revenue divided by marketing budget

Commentary:

A quick an easy way to determine total impact of marketing for a company or discrete set of products. As with ROI, short form ROMI is not good at measuring long-term impacts

The Formula:

ROMI (Index) = Incremental Revenue Attrib. to Marketing ($)/ Marketing Spend ($)

 

Metric: Margin ROMI or mROMI

The Question:

What incremental profit do I get from incremental marketing spend?

Approach:

Incremental profits generated by marketing

Commentary:

As marketers we believe that what we do is an investment creating lasting value. ROMI shows us the revenues generated, mROMI shows us margins generated - ie our contribution to profits

The Formula:

mROMI (Index)= ROMI * Contribution Margin %

 

Using ROMI 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 & CFO current performance and future improvements

 

ROMI Examples and Tests

ROI & ROMI Test Run

Campaign 1

Incremental Revenues = $250,000

Incremental Costs = $50,000

Contribution Margin = 30%

Campaign 2

Incremental Revenues = $50,000

Incremental Costs = $20,000

Contribution Margin = 50%

Calculate ROMI, mROMI and ROI for both Campaigns

Which campaign has better ROI? And why might you still prefer the other campaign?

ROI & ROMI Test Run Answers

Campaign 1

ROMI = $250k/ $50k = 5.00

mROMI = 3.0 * 30% = 1.50

ROI = (1.50 - 1.00) * 100% = 50%

Campaign 2

ROMI = $70k / $20k = 3.50

mROMI = 3.5 * 50% = 1.75

ROI = (1.75 - 1.00) * 100% = 75%

Campaign 2 has better ROI. For every dollar invested in Campaign 2, $3.50 in revenue and $1.75 is returned, for 75% ROI, compared to 50% ROI for Campaign 1

If the Marketing Manager needs to deliver volume, and if Campaign 2 can't be scaled up, then they still might pick Campaign 1 - or both to improve overall ROI

Example - Online Travel Agent ROMI Calculations

Online ads (banner ads, text ads, widgets, search ads and eDMs) tagged with a code from an Ad Server

Ads are tracked 'post impression' - a sale will be attributed up to 30 days after an ad is viewed

The revenue for that booking is attributed to the ad, minus any cancellations

Revenue and margin data is reconciled using database queries

Media cost data is manually added

A 'Last Touch' Attribution methodology is used - all revenues are said to be caused by the last ad impression (display) or click (search/ text ad)

COGs = Wholesale cost of hotel room

Cost Per Room Dollar = Cost of Sale = Media Cost/ Rev

Agency Costs = fees directly attributable to campaign + share of general fees (ie agency costs)

Internal Costs = fees directly attributable to campaign + share of general fees (ie staff + share of overheads)

SG&A = Media costs + Agency Costs + Internal Costs

Test - Calculate 'Media' ROMI, SG&A, ROMI, Contribution Margin, mROMI & ROI for the Online Travel Agent

This is one campaign out of 4 the agency is engaged to run
This campaign has the following total revenues and media costs
Revenue = $183,501.64
Media Cost = $18,823.77

1. What is the 'Media' ROMI for this campaign? For every dollar invested in media, how much revenue will we generate?

Marketing AgencyFees
Creative Production Costs for this Campaign = $8,021.02
Mgmt & Reporting Costs, for 4 Campaigns = $12,665.00
Internal Fees
Marketing Staff, for 4 Campaigns = $4,872.21
External Tech Fees, for 4 Campaign = $2,000.00
Cust Service & Finance Dept Costs, this Campaign = $2,818.90

2. What Total SG&A Cost Figure should we use?

3. What is our net ROMI? For every dollar of marketing budget, how much revenue will we drive?

4. Revenue = $183,501.64

5. Media Cost = $18,823.77

6. What is the Contribution Margin for this campaign?

7. What is the mROMI for this campaign? For every dollar of marketing budget we invest, how much marginable revenue do we contribute?

8. What is our total effective ROI for this campaign?

9. Is it a good or bad ROI?

 

Sales & Marketing

Marketing for Dummies Guides

Measuring, Marketing, Metrics & KPIs

Online Marketing/ Digital Marketing

 

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