Understanding Return on Marketing Investment

Now, more than ever, agile firms must track their marketing spend to ensure that it is producing results.

Everyone knows that when you’re investing in a stock or a bond or a piece of real estate the goal is to “buy low and sell high.” Return on investment (ROI) for standard securities is fairly simple to understand. A positive ROI means your investment netted more than you put in.

There are several more complicated ways to calculate ROI depending on the type of security or business venture being examined, but at base, that’s what is being talked about: how much money did you make? It’s a basic question with far-reaching implications, and, in these increasingly challenging times, optimal allocation of resources is absolutely vital to survival.

Build Today for a Brighter Tomorrow

Return on marketing investment (ROMI) is a newer, slightly more complicated concept. Spending on marketing is not like other kinds of investments. Monies aren’t tied up in capital expenditures like factories and equipment and you don’t end up ‘owning’ anything tangible like shares in a company, a warehouse, or a plot of land. But make no mistake, marketing spend absolutely buys you something incredibly valuable, even necessary.

“Short term ROMI studies can help steer current investments away from unproductive activities. Longer term evaluations clue you into the global health of your brand.”

Sometimes what it buys translates directly to money back in your pocket in the form of new sales or higher profit margins. But it can also earn you more abstract rewards like increased brand awareness or a ticket into a lucrative, new market. That’s where things can get complicated.

For this reason, marketing ROI expert Rex Briggs, author of “What Sticks: Why Advertising Fails And How To Guarantee Yours Succeeds,” a best-selling book on the subject, suggests considering Return on Marketing Objective (ROMO) as a complementary tool. ROMI is extremely useful in short-term analysis, but ROMO is better at giving you the long-term, holistic picture of what your marketing efforts are doing for you.

Do the Math

There are numerous formulas for calculating ROMI, but a common and basic one is based on dividing your Lifetime Value of Revenues (LTV) by your Cost of Customer Acquisition (CAC).

LTV is determined by looking at your average transaction size and comparing it your repeat customer rate. For example, if half your customers are repeat purchasers and your average transaction is $100 that means the average customer spends $100 in year one, $50 in year two, and so on. At that rate, your LTV is about $194.

CAC refers to the marketing costs of finding and converting a lead into a purchaser. It is determined by looking at the percentage of revenues devoted to marketing. If, for example, 10% of $1,000,000 in revenue goes to marketing in a given year, and 5,000 new customers are earned in that period, your CAC is $20 per customer.

In this example the LTV is 10x the CAC, which is a very healthy ROMI. 5x is an average return; anything less than 3x is considered dangerous to the bottom line.

Protect Brand Growth

Short term ROMI calculations require measuring the incremental sales attributable to marketing. In other words, how many new dollars of revenue (or market share) were the result of marketing spend. Longer term evaluations take into consideration other factors such as incremental brand awareness or increased purchase intent.

There is often confusion when determining ROMI as to how brand equity and brand valuation fit in. Brand equity is directly connected to customer perceptions, behaviors, and feelings of goodwill towards the brand. Brand valuation is more concrete. It’s a financial estimation of the brand’s worth in dollars, i.e. what would someone pay to purchase the entire brand. In general, brand equity increases brand value, but only the latter figure can be used in determining ROMI.

Both long and short term evaluations are useful in optimizing your marketing mix (the four Ps: price, product, promotion, and place). If you don’t know how effective your marketing is, you won’t be able to properly allocate your resources. Advertising pioneer John Wanamaker once famously said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” ROMI goes a long way in tackling that problem.

Short term ROMI studies can help steer current investments away from unproductive activities and put them to better use. Longer term evaluations clue you into the global health of your brand and the overall direction it’s taking.

Final Word

An investment in marketing may be different than other business transactions, but it’s no less vital to the overall health of your enterprise. Just as a company that fails to keep up with its logistical demands will see its market share dwindle, so too will a company that neglects to service its brand. An investment in marketing is an investment in the future of your company.

Do you need help tracking and analyzing your marketing investment? We have the insights and expertise to answer your toughest questions. Reach out today.