In this article, I’m going to tell you not to bother with ROI as a number. I’m chucking it in the bin. Once you’ve read this, hopefully you’ll gain a little more perspective on marketing jargon – and the next time a marketer says to you “we’re going to bring you a return on your investment,” you can confidently tell them to do one.
The illusive return on marketing investment (ROMI) is a problematic concept. Most marketers shy away from it because they don’t really understand it – yet business leaders insist on financial proof that their marketing spend is an investment.
This is where marketers get themselves in trouble. If they can’t prove (or explain) the impact of their efforts in financial terms, then “marketing” is deemed unworthy of trust. That’s why marketing budgets are typically risked.
When you get into the mathematical workings of ROMI, you can understand why it’s a sore subject for marketers – and why marketing has lost much of its integrity, especially when marketers skirt around the issue with no alternative.
Let’s all just merrily skip along in creative ignorance.
Or, how about we actually figure this out.
The ROMI equation
Let’s look at the academic definition of ROMI, as explained by Farris et al (2017)
“Although no authoritative sources for defining it exists,”
“…we believe the consensus of usage refers to ROMI as the dollar-denominated estimate of the incremental financial value to the entity generated by identifiable marketing expenditures less the cost of those expenditures as a percentage of the same expenditures.
Ah, yes. Exactly. Do go on…
“There are many ways to estimate the financial value generated by marketing. The most commonly employed method is to estimate incremental contribution margin, net of marketing, generated by marketing divided by the marketing spend.”
Obviously. We all knew that. *Screams into pillow*
I’m not even going to break that down, because two recurring words bother me here:
“Estimate” and “incremental.”
These are not conducive in trying to prove the financial worth of the marketing department to a stern FD.
OK, let’s put this into an example.
You’ve run a marketing campaign. You’ve spent £10,000 on this campaign, and it’s run for two months. From this campaign, you’ve made £9,900 in sales. The campaign has failed, right?
On the surface, you’ve made a loss of £100. But let’s go back into more details.
You’ve run a marketing campaign. You spent exactly £10,000 on video production, graphic design, copywriting, web design, email marketing, display advertising across Facebook and YouTube, then the costs attributed to set-up, tracking, management, and reporting. The campaign launched and ran for two months. Every trackable sale equated to £9,900, within that two-month campaign period. So, it failed, right?
Wrong. Look again.
You’ve run a marketing campaign. You spent exactly £10,000, most of which was spent on video production. As part of the campaign mechanics, the video was fired out through Facebook advertising and placed on YouTube. Facebook metrics report that the video was watched for over 30-seconds by 10,000 people (quick disclaimer: Facebook metrics are also estimated). One of those viewers was Colin from Scunthorpe. He liked the look of the product. Later in the pub, he was telling his mate Bob about it – he couldn’t find the video he saw, so he Googled the brand name. Bob went “oh cool, send me that link will you.” “Yeah, no worries Bob.” Bob goes home. Three months later he needs what you’re selling, and rummages back through his messages from Colin to find that link. He places an order for £100. He gets the product next-day and is well impressed, so he shows Sarah. She goes “oooh, I want one too” so she goes away and places an order for £300. Meanwhile, Bob leaves a 5-star review on Google. John in Skipton comes across it and goes “must be good if Bob likes it.” He places an order for £700. Now you’ve made £1,000 profit from that campaign, but it’s too late because you’ve already been sacked by the FD for losing money.
So, how do you measure the incremental value of that campaign? I’ll ask that again, over the long-term, how do you measure the increasing value of your marketing activity?
Unless you’re Einstein, don’t even bother trying to understand the equation – or asking a marketer to present these figures to you.
Instead, here’s my step-by-step guide to easily measuring marketing.
Step 1. Stop compartmentalising marketing as a department.
In fact, stop defining marketing as a single entity that just spends money on print and Facebook ads.
Marketing, by definition, literally means “taking a product to market.” Everything your business does – the absolute purpose of your business – is to generate a transaction with a customer.
Your business shouldn’t have a marketing department. Your business is marketing itself, powered by people who understand the customers.
Placing all that weight on a 22-year-old graduate with no previous business experience (but can make social media look pretty) seems a little daft. Of course their figures won’t add up, silly billy.
To pull off marketing activity, you need skilled individuals who can run campaigns, manage social media, design effective ads, write perfect copy, etc. But they should not be held responsible for the return on your meagre pot of money you call a “marketing budget.”
Marketing needs to be directed with a robust market strategy and a strategic-level professional at the helm.
Step 2. With that in mind, you need a marketing strategy.
Marketing strategy is not about simply planning marketing activity.
Marketing strategy is a deep analysis and understanding of your market. It informs all your business decisions to find the most efficient route to generating profit.
It’s within your marketing strategy that you define and measure your sales, revenue and profit targets.
Step 3. Measure the success of marketing long-term with relevant, SMART objectives
SMART objectives are set by you. They are time-bound targets that the ensure everyone is on the same track. Your marketing success is measured entirely against these figures. If you hit them, your marketing is successful. If you don’t hit them, something’s not worked, so diagnose.
By committing your targets to a long-term timescale (12 months, fiscal year is a good one), then collective effort across the organisation is much easier to comprehend.
For example, these are pretty good ones to start with (sense the sarcasm):
Then back them up with how much each customer costs (a good indication of marketing efficiency) and what customers are worth to you over time (indicating loyalty):
- Customer acquisition costs (CAC)
- Customer lifetime value (CLV)
These are just examples and may not be relevant to your business – but they are fairly common.
The secret is to work towards achieving them with time-bound KPIs (Key Performance Indicators). There is no need to get overcomplicated. If CAC is an objective, then you need some efficiency KPIs in place. If CLV is to be achieved, then you need customer satisfaction KPIs, for example.
In conclusion, forget ROMI. It’s in the past. Set targets and you’ll see where you need to be in future. Check if you’re on track in the present by measuring your KPIs.