In order for any business to be profitable, it clearly has to make more money than it spends. So when looking at any investment, a business needs to know that the total benefit of that expenditure – the return – will outweigh the costs. Businesses, therefore, look at the projected ROI – the Return On Investment – whenever they are making a decision to purchase new equipment, expand the business, take on staff or plan any other significant outlay.
Generally, with tangible purchases, this is fairly easy to measure and calculate, but in areas like marketing, where measuring results isn’t always straightforward, it can be more difficult.
What is ROMI (return on marketing investment)?
When we discuss the ROI of marketing, we talk about ROMI – or Return On Marketing Investment. It’s no different in principle to ROI – it just makes it implicit that we are discussing marketing. Whereas ROI is useful to the whole business or to finance departments, ROMI is of specific interest to marketing departments.
ROMI is important because it is very easy to run marketing campaigns or spend money on branding without actually knowing whether they are worthwhile or not. Results can be very difficult to measure.
Marketing can be costly, so it’s important to get value for money, not only knowing whether a marketing activity is successful, but how successful, and how it compares to other activities. This information will allow you to run better and more cost-effective campaigns, making your marketing budgets go further.
Before we move on to discuss this in more detail, we need to acknowledge that not all marketing activities are aimed at a short-term return – some may be aimed at changing brand positioning for example, or establishing a new brand, or protecting reputation. These are long-term goals that take time to see an impact. The term ROMO has been suggested to cover this – Return On Marketing Objectives. Here you would be looking to see whether the marketing spend delivered the expected objective.
For this blog post, we will restrict ourselves to ROMI and look at what it is and how to measure it.
ROMI is composed of two elements:
- how much you spend on a marketing activity
- how much revenue that activity creates
You are looking for the revenue to be greater than the expenditure otherwise the business would be in a better financial position without that marketing activity – clearly not a situation you want to be in.
Providing you have reasonable accounting procedures in place and track all your orders, then working out how much you have spent on any activity should just be a matter of adding it all up. (But don’t forget to include the cost of people’s time – including management time – along with all associated overheads.)
It is the measuring of revenue that is always going to be the more problematic, mostly because it is difficult to work out what proportion of revenue can be attributed to a particular marketing activity.
For example, publishing a blog post will involve some costs – the cost of someone’s time spent writing, the cost of the publishing platform, overheads etc. But how do you know what impact it has? How do you quantify its contribution to revenue? It could influence no one or even worse, be read by no one. On the other hand, one person could read that blog post, think you are an amazing company and place a huge order merely on the basis of that post. But how would you tell?
One of the main differences between ROI and ROMI is that with ROMI you often have to be a little more pragmatic – you have to take a view. With ROI the figures are defined and precise. With ROMI they may be more estimation and guesswork involved.
One key decision is how granular you go – it would be wrong for instance, to look at the ROMI of one blog post in isolation as the effects of blogging are cumulative. So you might look at six months’ worth of posts or even a year’s worth. (That’s not to say you wouldn’t track engagement on every single post and work out which posts are more effective, but it would not be useful to look at ROMI).
There are various metrics you can use to help determine the revenue side of ROMI. The most common being;
- Number of leads generated – how many leads can you attribute to this marketing activity?
- Lead-to-customer-rate – how many of those leads became customers? This is likely to be an average you have worked out over time.
- Average order value
- Cost of marketing activity
Each of these can vary in a number of ways. When it comes to leads, you may operate a system of percentages, so you might attribute a percentage to your marketing activity if there are other elements in play. For the leads to customer rate, you may use a figure you have averaged out over time rather than a specific measurement for that particular activity.
And average order value may not be appropriate – you may not be able to attribute specific orders to that marketing activity, for example. If your order values vary wildly, then the value of orders generated is something you would need to consider measuring for each activity.
In its most basic form ROMI = (net profit/total cost) x 100
(net profit divided by total cost then multiplied by 100)
ROMI is normally expressed as a percentage, so you are looking for percentages greater than 100.
To expand that further, ROMI = (Return – cost of marketing activity / cost of marketing activity) x 100
Using the metrics we listed above, we calculate the return the activity generated by:
- Counting the leads attributed to the activity
- Using our lead-to-customer ratio to work out how many of those were likely to have become customers
- Then multiplying that number of customers by the average order value
For example, an activity generates 30 leads. We know our lead-to-customer ratio is 3 to 1, so this activity will have resulted in 30/3 customers or 10 customers.
We know our average order value is £2,500 so the revenue generated by this activity is 10 x £2,500 or £25,000.
Let’s assume our costs were £5,000
ROMI then becomes: (25,000-5,000/5,000) x 100 or 400%
Issues with calculating ROMI
Unlike ROI, which uses real figures, the calculations for ROMI use assumptions and therefore are not as reliable or accurate. That does not mean that ROMI is not useful, far from it, it just means you need to be careful when measuring results and not take the figures too literally.
Measuring the number of leads generated by a specific marketing activity is notoriously difficult, as marketing activities do not take place in a vacuum. Salespeople are picking up leads all the time – how can you tell if any of them were triggered by your marketing efforts? Is last year’s marketing campaign still having an effect? Bringing in leads at the same time as your current campaign? How do you separate them out?
Ad campaigns, social media, events, press coverage – all could be operating at the same time. It takes, on average, 6-10 touchpoints before a buyer reaches a decision. It is important to have robust methods of tracking leads to offset this as much as possible.
Marketing activities rarely take place in a single channel – today campaigns are omnichannel. This means that you have to have reliable methods of tracking and attributing leads across all the channels in the mix.
One way to improve your chances of measuring and attributing leads, customers and sales is to use a robust marketing platform – one that has tracking and attribution built in at every step. Like HubSpot, for example.
The time from the initial lead to the final sale is also a factor. If it takes nine months due to the complexity of the process – the number of people involved in the buying decision being just one factor – then it becomes harder to say that last year’s marketing effort resulted in this year's sale. This is particularly noteworthy for contract manufacturers, as they tend to have long and complex buying cycles. So it may be a while before you get to see your ROMI.
Lead-to-customer rate is not a fixed ratio, it will vary constantly, so this rate will always be a best guess. Measuring how many leads you have in a month and how many customers that generates is crucial here.
If you can work out the exact amount of sales generated by a given marketing activity, then you should use this figure for revenue rather than number of leads x lead-to-customer ratio x average order value.
With campaigns that run over an extended period or which will take significant time to have any effect, it may well be worthwhile measuring ROMI quarterly or bi-annually and then averaging the figures at the very end. This will give you some idea in the short term as to whether it is being effective, and then at the end, just how effective it was overall.
ROMI does not necessarily relate to the bottom line, however. For example, you may have some services that are more profitable than the rest. Any marketing that increases the sales of those services will create greater revenue for the company than marketing aimed at the less profitable services, but this is not a concern of ROMI as it tends to just focus on sales figures, not profitability. It could be argued that the choice to push more profitable services would be a business decision anyway.
When will you see your ROMI?
So how long before you might see ROMI for any given marketing activity? Well, that really is a “how long is a piece of string” question. Here are some factors that will determine the answer:
- How long the marketing campaign runs for – clearly you can’t get a figure for ROMI until the campaign is over
- How long will it take to have an effect – in some circumstances results may be almost instantaneous, in others it may take months before you see any results
- How long is the buying process? – A long buying process may well affect how long it takes to measure ROMI
- Have you had time to work out a credible lead-to-customer ratio?
- Have you had time to work out a credible average order value?
- How long does your marketing system take to return the relevant figures?
- If you are looking at actual sales values, how long does it take accounts to feed those back to you?
Before any marketing investment, you need to do a rough ROMI by looking at the number of leads you expect to generate. That should give you a guide to how worthwhile the activity is.
The value of ROMI
Even with all the caveats, assumptions and averages outlined above, ROMI is still a useful measurement helping you to figure out what activities are worth pursuing, which channels work better for you and identifying marketing budget being spent in areas that are not working as hard as they should.
While contract manufacturers may be eager to see immediate results from their marketing investments, it's essential to exercise patience when measuring ROMI. By allowing an adequate timeline for campaigns, taking into account industry-specific buying cycles, and ensuring accurate metrics and data, contract manufacturers can gain a more comprehensive understanding of the effectiveness and profitability of their marketing activities.