ROI or ROMI (Return on Investment or Return on Marketing Investment)
Return on Marketing Investment (ROMI) and Marketing ROI are defined as the optimization of marketing spend for the short and long term in support of the brand strategy by building a market model using valid, objective marketing metrics. Improving ROMI leads to improved marketing effectiveness, increased revenue, profit and market share for the same amount of marketing spend.
There are two forms of the Return on Marketing Investment (ROMI) metric.
- short term ROMI
- long term ROMI
The first, short term ROMI, is also used as a simple index measuring the dollars of revenue (or market share, contribution margin or other desired outputs) for every dollar of marketing spend.
For example, if a company spends $100,000 on a direct mail piece and it delivers $500,000 in incremental revenue then the ROMI factor is 5.0. If the incremental contribution margin for that $500,000 in revenue is 60%, then the margin ROMI (the amount of incremental margin for each dollar of marketing spent is 3.0 (= 5.0 x 60%).
The value of the first ROMI is in its simplicity. In most cases a simple determination of revenue per dollar spent for each marketing activity can be sufficient enough to help make important decisions to improve the entire marketing mix.
In a similar way the second ROMI concept, long term ROMI, can be used to determine other less tangible aspects of marketing effectiveness. For example, ROMI could be used to determine the incremental value of marketing as it pertains to increased brand awareness, consideration or purchase intent. In this way both the longer term value of marketing activities (incremental brand awareness, etc.) and the shorter term revenue and profit can be determined. This is a sophisticated metric that balances marketing and business analytics and is used increasingly by many of the world’s leading organizations (Hewlett-Packard and Procter & Gamble to name two) to measure the economic (that is, cash-flow derived) benefits created by marketing investments. For many other organizations, this method offers a way to prioritize investments and allocate marketing and other resources on a formalised basis.
Criticism and defense of marketing effectiveness
Direct measures of the short term variant of ROMI are often criticized as only including the direct impact of marketing activities without including the long-term brand building value of any communication inserted into the market.
Short term ROMI is best employed as a tool to determine marketing effectiveness to help steer investments from less productive activities to those that are more productive. It is a simple tool to gauge the success of measurable marketing activities against various marketing objectives (e.g., incremental revenue, brand awareness or brand equity). With this knowledge, marketing investments can be redirected away from under-performing activities to better performing marketing media.
Long term ROMI is often criticized as a ‘silo-in-the-making” – it is intensively data driven and creates a challenge for firms that are not used to working business analytics into the marketing analytics that typically determine resource allocation decisions. Long term ROMI, however, is a sophisticated measure used by a number of forward thinking firms interested in getting to the bottom of value for money challenges often posed by competing brand managers.
Source – wikipedia