Simply put, a return on marketing investment, commonly known as a ROMI in the accounting world, is the amount of money a company or business has made in direct response to a specific marketing campaign. Most often it's presented as a rough percentage or estimate, and is typically used as a model for measuring the effectiveness of marketing campaigns. Analysts often study patterns and trends as a tool when developing new branding strategies, too. In most companies, marketing — which includes advertising and any number of sales-driven expenses — is a very costly undertaking, and costs are often spread over several campaigns and initiatives. It can be hard for companies to ascertain their true effectiveness, which is where ROMI comes in.
Understanding Marketing Returns Generally
Marketing returns are usually divided into two types: short-term returns and long-term returns. In general, short-term returns are relatively easy to calculate, but long-term returns are more intangible and thus more complex. Among other things, this means that short- and long-term returns require different calculations and take into account different marketing and socioeconomic factors.
A short-term return on marketing investment typically looks to test the value of a single marketing campaign or the value of multiple campaigns for a single product or service. Something like a leafleting campaign for a new type of mail-order detergent or a series of billboards and print ads for a local restaurant are simplified examples. The cost of the marketing campaign as a whole would be relatively easy to calculate in both scenarios, and any immediate increase in sales and profits could be more realistically attributable to these efforts. Things can be a lot harder with multiple strategies for various products and services over a longer span of time, in part because it gets harder and harder to correlate specific marketing efforts with consumer behavior.
Basic Formula
The core formula is generally taught as gross profit minus investment, divided by investment. If a leafleting campaign that cost $250 US Dollars (USD) generated $1,200 USD in sales of an item that cost $900 USD to produce, there would be a gross profit of $300 USD. That gross profit minus the $250 USD cost of the campaign equals $50 USD; divided by $250 USD, this creates a return on marketing investment of 0.2, or 20 percent.
Basically, this number means that every $10 USD spent on the advertising campaign created an additional $2 USD in net profit. If the campaign had generated only $600 USD in sales for $200 USD in gross profit, the ROMI would be calculated at minus-20 percent, meaning that the company actually lost money because it cost more for the leafleting campaign than that campaign realized in gross profit.
Including Both Profit and Investment
The most difficult element of this equation is calculating additional profit and the cost of investment. In the example used above, the brand awareness comes only from leaflets, but most marketing campaigns use a variety of methods, including but not limited to television commercials, radio spots, newspaper advertisements, and ads on social media websites. Businesses often do not know exactly how much new revenue is generated by a specific method of marketing, and making even an educated guess is often really difficult.
This means that the sales and marketing departments are left to calculate profit and investment. This calculation requires the cost of goods sold (COGS) and the cost of producing the campaign. Marketing requires research, production, labor and placement costs. This becomes more complicated with sophisticated marketing campaigns, multiple products and multiple sales strategies.
Long-Term Considerations
A downside of short-term estimations of return on marketing investment is that they do not factor in long-term returns. Long-term returns are more difficult to calculate because they include things like brand awareness, impulse buying, and word-of-mouth advertising. Results from long-term metrics are less reliable because there are so many variables involved. Still, they’re often considered helpful when it comes time to create new campaigns or determine whether a certain type of marketing strategy is likely to be worth the up-front costs. There are never any guarantees, but strategies with a history of favorable returns, even if these returns can’t be precisely calculated, are often the ones most commonly repeated.