Do you know the amount of money businesses across the world are expected to spend this year on marketing, advertising, and communications? Approximately $237 Billion! With each passing year, companies have been increasing their marketing spends. In fact, the global marketing spends in 2018 are expected to rise by 12% as compared to 2017 numbers.
With so much of money being spent, how do you know whether it is worthwhile or not? The answer is ROMI – Return on Marketing Investment.
If you are a marketer preparing a marketing plan, return on marketing investment is a key metric to talk about.
This article will take you through, in detail, of what is Return on Marketing Investments, why is it even important for marketers to calculate it, what are the considerations you need to take when calculating the ROI and what are the potential and relevant challenges that you are likely to face doing it.
Understanding the Marketing Spend
Now, you read those numbers at the beginning, that’s the amount of money corporations is keeping aside to spending on marketing. And it’s huge!
While I build this case for marketing, there are organizations are around us that don’t understand marketing. They feel they don’t need it.
Or a few of them are brave to admit that they don’t understand what marketing should be like for them.
You would see this more in the case of B2B organizations that sustain for decades on a few key accounts that they gather and continue to serve. More so, this is extremely relevant in the case of technology companies that operate in B2B. Atmel of the 90’s, the microprocessor manufacturer, is a good example of this.
Whereas, Intel Corporation, which is in the same or similar business, is completely antipodal in its marketing spend nature. It does infuse money into marketing and takes it seriously. And then there also organizations like IBM, which, if you keenly observe, are just marketing companies, with no or minimal production facilities with them. They outsource their products and market them!
Now here’s my view in all of this. I am of the opinion that there should not be a ceiling for the marketing budget at all. Now, this is not the same as not having a marketing budget. Sure, you need to allocate some money to various things beforehand and it includes marketing as well.
But what I am getting at is that, if your marketing expeditions are hitting the nail on the head each time, and it is turning out to be a real profit minter for you, you as a decision maker must seriously consider crossing your marketing budget.
I want to make sure you understand this. What I am getting at is that only in the situation where your marketing is generating an enormous amount of profit for you, and you see further potential, then you must, unhesitatingly reroute some of those profits back to marketing.
Sure, now how do you measure whether something in your marketing efforts is worth the while or not. That’s where the Return on Marketing Investment comes in.
What is Return on Marketing Investment?
Return on Marketing Investment, or ROMI, as it is being called off late, is just what it sounds. It is a way to measure the returns that your company is generating on every unit of marketing money being spent. It is a calculation that assesses whether your marketing activity was a success or not.
Marketing ROI is important to marketers and companies for various reasons –
- Sanctioning Marketing Budget: During the annual budget planning, every department such as marketing, sales, finance, operations etc. puts forth a budget request.
The budget sanctioning is subject to various factors, including how much returns will the department generate for the company. Marketing ROI becomes an important calculation for getting the adequate amount of money allotted.
- Identifying the right campaigns: Suppose that the company ran 3 campaigns last year – One on TV, one on radio and outdoor, and one in the print media. Which of the three got the best results? The results can be used to decide how much money to allot to which channel this year.
While measuring marketing activities in the short term is a difficult task, several exercises have been developed for the same.
- Competitive Benchmarking: Organizations always want to see how they are faring as compared to their competitors. While marketing spends may not be public information, the same can be determined via various sources, such as annual reports and industry research study magazines.Measuring your ROI versus your competitors’ is one of the reasons why ROI calculation should be undertaken.
- Accountability: The company management often demands a complete documentation of how the money being allotted to each department is being utilized, and what are the returns.Since you will be held accountable for the same, it is important to justify every rupee being spent on marketing activities.
And you can justify the same only if you have the ROI calculations with you.
Calculating Return on Marketing Investment
Calculating the Return on Marketing Investment is just like any Return on Investment calculation. You need to take into account the following 2 things –
- Marketing Expenditure
- Gross profit from the marketing effort
The aim is to have a figure greater than 1. If the marketing ROI is 1, then it means that you have broken even on your marketing investment.
It is important to note that you use gross profit, i.e. profit earned after deducting costs associated with making the product.
Gross Profit = Revenues – Cost of Goods Sold
Consider this scenario – You spent ₹150,000 on marketing and got in revenues worth ₹300,000.
The margin you have per product is 50%, meaning that the cost of goods sold is ₹150,000. So, your gross margin is ₹150,000.
The goal, therefore, is to have an ROI that is as high as possible. If you are not making money from your marketing expenditure, you might as well put it in the bank and earn some interest from the same!
Companies often factor in several risks and pre-decide an ROI that they want to target. Then they work towards achieving the same. This also includes taking into account the cost of capital, since firms usually borrow money from investors, banks, or from the market.
Considerations while calculating Marketing ROI
Calculating Marketing ROI is not as straightforward as it seems. Sure, we have seen a formula that seems incredibly simple, but there are various challenges involved in this calculation.
First of all, arriving at the marketing investment itself is a task.
Some organizations prefer to take only the cost of buying media spots, whereas others include everything right from the cost of the marketing agency involved in the cost of airing the marketing campaign. It is always advisable to take the entire cost, including the marketing agency commission. This makes your calculation robust.
The second consideration is to determine what is the incremental value you are gaining by spending on marketing activities?
This means, in absence of the marketing activity, how much revenue would your company have generated? Unless you know this, you will never be able to determine the true impact of your marketing activity.
In order to determine the same, you can do several A/B tests by choosing two different test markets that behave in a similar manner and then run marketing campaigns only in one of them. This will help you in estimating the revenue lift as a result of marketing activities.
Challenges involved in Marketing ROI
- Attribution: Every marketing activity employs a mix of channels to achieve the business objectives. These channels may be print, online, television etc.
It is possible that someone might have seen your advertisement online, then on the TV, and then bought your product.
When you calculate the effectiveness of individual channels, it may be difficult to attribute which channel in the channel mix actually delivered the best results. This definitely calls for a separate post on marketing attribution.
- Estimating Long-Term Value: What about the marketing campaigns that do not generate any profits upfront?
Yes, companies run many campaigns that are there just to get the audience acquainted with the offerings or for brand building. These marketing initiatives reap benefits in the long run but not instantly.
Every marketing activity generates certain brand equity for the brand. With each passing marketing campaign, this may grow stronger. It may, therefore, be difficult to establish the true returns generated from a marketing campaign in the long term.
- New Customers Vs Old Customers: While taking the gross profit into account, we rarely do a split of the revenues generated from old recurring customers and revenues generated from new customers.
Ideally, the old customers would have visited even in absence of the marketing activity. The true impact of the marketing campaign, therefore, gets difficult to ascertain.
As you saw, calculating the marketing ROI is not as simple as it may appear.
It is important to understand that factors such as what value to take for marketing expenditure, which channels to give how much attribution to, and how much split of new vs old customers to consider differ from company to company.
For the sake of simplicity, we will go with the marketing ROI calculation we have seen above. It holds well in most of the cases.
Sure, while calculating the Return on Marketing Investment is easier in the case of digital marketing initiatives, it becomes a hell lot difficult on the offline campaigns. Astute calculation taking into consideration the points of consideration and challenges that I mentioned above will make you benefit from it.