Return on Marketing Investment (ROMI): Definition, Formula, Examples & More!
Both brand giants and local niche players spend big bucks on marketing communications. In fact, global spending on media was estimated to reach $2.1 trillion in 2019, up from $1.6 trillion in 2014.
However, is all that money well spent? More fundamentally, does marketing really work?
Return on Marketing Investment (ROMI) can help answer these questions.
In this blog post, you’ll find everything related to Return on Marketing Investment (ROMI), including definition, importance, formula, and so on.
Without any further ado, we should begin now!
Table Of Contents
- What is Return on Marketing Investment?
- The importance of ROMI
- The difference between ROMI, ROI, and ROAS
- How to calculate Return on Marketing Investment?
- Return on Marketing Investment Example
- What is a good Return on Marketing Investment?
- 3 Challenges of measuring Return on Marketing Investment
- 6 Tips to effectively improve your ROMI
- The final verdict
What is Return on Marketing Investment?
Return on Marketing Investment (ROMI), also called Marketing ROI or mROI, is a method of measuring the return on investment from the amount a business spends on marketing. It can be used to evaluate the return of a specific marketing program, or the company’s overall marketing mix.
With ROMI, you can see how well your ads, SEO, emails, blog, and other marketing channels pay off. ROMI only takes marketing expenses into account, and it doesn’t consider production costs, rent, and payroll.
For example, your company is making designer lamps and promoting them on Facebook. You also send emails. You will use the ROMI formula to see which channels are cost-effective and which are not. You’ll see how much money each dollar invested makes.
Many experts believe that ROMI is a subset of ROI (Return on Investment). ROI is a broader term, and it measures the overall gain or loss incurred with respect to the investment made by a company. Meanwhile, ROMI refers to the profit made or loss incurred with respect to the investment made in the marketing campaigns only.
The importance of ROMI
The goal of ROMI is to measure how marketing investments influence your revenue. Using ROMI, you can evaluate which promotion tools are profit-making and which ones are loss-making. When you see how much you spend on marketing activities and what revenue it generates, you can reallocate your budget into more cost-effective campaigns.
At an organization level, measuring ROMI can help guide business decisions and optimize marketing efforts. To be specific, ROMI helps:
Justify marketing spend
Chief Marketing Officers (CMOs) consistently list allocation resources and budgets for marketing efforts as a top priority. Nevertheless, to secure budgets and resources for future campaigns, it’s essential that the current budget and spend be justified at the executive level.
To do so, marketers need to calculate the ROMI accurately. For instance, knowing if native ads are driving conversions and ROI, while display ads fall flat. From there, budgets can be allocated appropriately.
Distribute marketing budgets
Across online and offline channels, there is a myriad of possible marketing mix combinations. But any combination of campaign initiatives requires funding.
That’s why understanding which offline and online efforts drive the most revenue is a must for distributing the marketing budget properly.
Measure the campaign’s success and establish baselines
A vital part of any successful marketing team is the ability to measure the campaign’s success and establish baselines that could serve as a reference for future efforts. With this in mind, measuring ROMI helps marketers do both.
By understanding the impact of each campaign on overall revenue growth, marketers can better identify the right mix of online and offline campaign efforts. Plus, measuring ROMI consistently enables marketers to establish baselines to quickly gauge their success and adjust efforts to maximize impact.
Track and analyze competitors
Companies always want to see how they’re faring as compared to their competitors. While ROMI is not usually public information, managers can use annual reports or industry research study magazines to estimate ROMI for a competitor. Competitor analysis is one of the reasons why ROMI calculation should be taken.
Related topic: Top 18 Best Competitor Analysis Tools
The difference between ROMI, ROI, and ROAS
ROMI is often mistaken for ROI and ROAS ( Return on Advertising Spend). Let’s figure out why these metrics are different.
As we’ve mentioned above, ROI is a return ratio of all investments. Unlike ROMI that only takes marketing expenses into account, ROI helps you evaluate the overall profitability of your project considering all investments. To calculate ROI, you need to take into account all expenses on the project and the revenues it generates.
Meanwhile, ROAS is the return ratio of your advertising expenses. It considers only your expenses on specific advertising campaigns. The objective of this metric is to find out if a company makes profits using particular marketing tools.
It is crucial not to mistake the ROMI, ROI, and ROAS as it may lead to grave mistakes.
How to calculate Return on Marketing Investment?
You can calculate ROMI using multiple formulas, depending on what makes the most sense for your business.
Return on Marketing Investment Formula:
Return on Marketing Investment (ROMI) (%) = [(Revenue generated by marketing effort - Cost of marketing effort) x 100] / Revenue generated by marketing effort
While it is a simple formula, it’s almost too simple.
As it sometimes might be difficult to track revenue, it’s more convenient to approximate it by using the following formula:
ROMI (%) = [((No. leads x Lead-to-customer rate x Average sales price) - Cost of campaign) x 100] / Cost of campaign
- Number of leads - the number of visitors that became a lead
- Lead-to-customer rate - the number of those leads converted to customers. For example, if 20 out of 100 leads became customers, the lead-to-customer rate would be 20% or 0.2
- Average sales price - the average price of your product. An average is particularly relevant if you occasionally apply discounts or alter pricing in other ways
Note: For both formulas, you need to know the total spend on building and promoting the marketing campaign. Some costs might be ad spend, costs related to producing content, or hourly wages of people that put time into the campaign.
Return on Marketing Investment Example
Let’s say you’ve got 1000 leads, and 50% of them become customers.
They spend $200 on average.
It costs you $4000 to market to these leads.
So, if you plug that into the above formula, it looks like this: ROMI (%) = [((1000 x 50% x 200) - 4000) x 100] / 4000 = [(100,000 - 4000) x 100] / 4000 = 9,600,000 / 4000 = 2400%
In this case, your ROMI is 2400%
Remember that your ROMI is continually evolving so it is essential to set a time limit when you calculate the return of each campaign. You might want to measure the return on a particular campaign on a monthly, quarterly, or yearly basis. Reviewing the ROMI on short-term and long-term grounds can help give you the best understanding of your campaign effectiveness.
What is a good Return on Marketing Investment?
The answer is: it depends.
It depends on the KPI you are modeling, your target audience, your specific industry and business, as well as your marketing budget and goals.
As a rule of thumb, however, we can say that the middle of the ROMI bell curve is typically a 5:1 ratio or $5 for every $1 spent.
An outstanding ROMI is 10:1, where you can get $10 for every $1 spent.
For some industries, an ROMI of 3:1 isn’t great, but it is excellent for a business in a different sector.
3 Challenges of measuring Return on Marketing Investment
The calculations needed to measure ROMI seem simple, but they can become complicated and layered. Let’s take a look at the following challenges when you measure your ROI in marketing.
Challenge 1. Multiple touchpoints
Perhaps the most significant challenge you’ll meet with measuring your ROMI is touchpoints.
Keep in mind that the customer journey isn’t linear - every customer journey is different. People can interact with your business in different ways, which can sometimes make it hard to know what piece of marketing resulted in a conversion.
Users can have multiple touchpoints; just look at some examples of a customer’s potential journey:
- Discovers your business through search
- Reads a blog post from your website
- Watches a video about your product
- Sees a targeted ad on social media
- Subscribes to your email list
- Purchases your product
During this journey, it’s difficult to know exactly what led the user to convert. It could be the targeted ad or the video that made them ready. There is not a clear-cut way to know which strategy made your audience convert.
Solution: Experts suggest that you should focus on the first and last touchpoints for attribution. This focuses on giving your ROMI “credit” to the first and last touchpoints before the sale. While it isn’t the only solution, it is an option to help measure your ROMI accurately.
In addition, investing in CRM software can help you easily track these touchpoints to understand what makes users convert. The best part is that you don’t need to spend hours investigating. Most of the software does the hard work for you!
Challenge 2. Measuring at the right time
Not every customer buys in the same amount of time. While you may have an average duration for your sales cycle, not everyone converts in the same amount of time. Some people may make impulse purchases and convert fast, while others take longer.
Plus, some strategies take longer than others to get conversions. For instance, email marketing may take sending a couple of emails to get a conversion, while a PPC (Pay Per Click) ad may generate a conversion with a single click.
That can make it challenging to attribute conversions to the right campaign.
As a result, you need to determine the right time to measure ROMI.
Solution: We recommend you make revenue cycle projections. With this solution, you measure the long-term effects of marketing strategies. You can use your history of metrics to make projections. Primarily, you will use past performance to predict which approach was most likely to generate a sale.
The downside with this solution is that it doesn’t factor in market changes or outside variables, so you need to consider these changes when identifying which strategies led to that conversion.
Challenge 3. Influence level
Another challenge you must consider is the variations of influence.
Not every marketing campaign will resonate with your audience the same. Many users will see your ad and not feel compelled, while others will feel compelled to act. When these visitors take action, it can skew your data and make it more challenging to accurately measure your ROMI.
Solution: You should work backward and look at each touchpoint to see how it impacted the customer. This solution is most beneficial to companies with longer sales cycles as it helps them have a clearer picture of which steps influence customers the most.
The downside with this strategy is that you might give more credit to a strategy than is due. Besides, it doesn’t account for outside variables that might influence how people engage with particular tactics or channels, like social media and email.
6 Tips to effectively improve your ROMI
1. Set your ROMI goals
If you want to improve your ROMI, it’s helpful to set a goal first. Having a well-defined goal can help you develop a plan for accomplishing and tracking your progress.
When you set your ROMI goal, make it SMART, which is specific, measurable, achievable, relevant, and time-bound.
Specific: Instead of something vague like “increase ROMI,” your goal should be something more specific, like “increase ROMI by 25%.”
Measurable: Make sure that you can measure your progress toward your goal. Have the right data collection and reporting methods in place as well.
Achievable: If your goals are not realistic, they will not do you much good. Your goals can be ambitious, but make sure that you can realistically achieve them.
Relevant: Your ROMI goals should be relevant to your overall business goals. Suppose your main objective is to increase sales; getting more Facebook likes isn’t a relevant goal unless it contributes to sales.
Time-bound. Define a timeframe within which you will aim to reach your goal. Making your goals time-bound provides more motivation for completing them in a timely manner.
2. Determine your core metrics and measure their effectiveness
Not all metrics can carry the same weight. For marketing ROI, you can focus on core metrics that are from the above formula. Even so, you should drill further down into these metrics to determine their impact on your revenues.
By determining your core metrics and measuring their effectiveness, it’ll help you change areas of your marketing campaign to increase your conversions and results for a higher ROMI.
3. Use A/B testing
A/B testing is an effective way to compare how two different campaigns can gather results. A/B testing can work on changing one element of a marketing campaign or website, then comparing it with the original.
To gauge whether your new changes have been successful, you should run the test for a set period of time until there is a clear winner. If you realize one version that really makes headway, you should move to that version, and start over again.
There are many elements that could be A/B tested, such as:
- Calls to action
- Page layout and design
- Font type
- Landing page copy
- Navigation links
4. Experiment with various campaign channels
Another tip to improve your ROMI is by experimenting with different campaign channels to see which ones perform best with your business and customers.
Some key channels to experiment include:
- Email marketing
- Content marketing
- Video marketing
- Digital ads
- Social media marketing
- Mobile marketing
By narrowing down which channels to use, according to what your visitors and customers like, you will have the potential to boost your ROMI greatly.
5. Focus on your spending and income
To improve your ROMI, it’s essential to know how much you’re spending at each stage of your campaigns. Keeping tabs on your spending can help you uncover areas where you’re spending too much but getting poor returns.
You can also find out how your channels are performing by comparing the conversion rate, leads, as well as profits generated by each. From there, determine whether the results are what you’re aiming for.
- What is a Good E-commerce Conversion Rate?
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6. Implement analytics and track KPIs
To know whether or not you are achieving your desired ROMI, track your key performance indicators (KPIs). These can tell you how effectively you’re reaching the goals you’ve previously set.
KPIs also require analytics. So, implementing comprehensive analytics allows you to see who is converting, who isn’t, as well as where those individuals may be choosing to drop out of your marketing funnel.
Actually, KPIs and analytics can help you refine your marketing campaign to better connect with your target audience. For example, if you find that there’s a leak in your marketing funnel and a significant percentage of qualified leads are getting lost, you’re able to make adjustments to your strategy and campaign to meet their needs and keep them in the sales process.
Remember to keep track of all kinds of data. Having a thorough understanding of how your audience behaves and interacts with your content is one of the best things you can do for your marketing campaigns.
The final verdict
You’ve reached the end of this Return on Marketing Investment (ROMI) guide. In this blog post, we’ve analyzed everything you need to know about ROMI, including the definition, importance, formula, challenges, and tips to improve ROMI as well.
Before you go, we’d like to remind you that there is no secret recipe for increasing your ROMI. If there were, everyone around the world would be using it. However, if you make the right changes to your marketing efforts, your business can see growth in many areas, including in your ROMI.
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