Why ROI is the Wrong Marketing Measure

Check out this great article on Forbes about Return on Marketing Investment.

I have long held the opinion that ROI should NOT be the only source of evaluating marketing success.  The article here is a great summary of why that is the case, and why ROMI (Return on MARKETING Investment), should be.  I like to keep things simple, so this is the formula I would use when identifying ROMI:

ROMIAs the article states, ROI is by no means a bad thing.  It’s necessary for business to have a barometer on success, but ROMI is a better measure for short-term marketing programming, or long-term evaluation of brand marketing success.  It produces a ratio.  If positive, it reflects a positive ROMI.  Obviously, the higher the number, the more efficient the delivery on return with respect the marketing Investment.  This would serve as a way to compare specific campaigns for effectiveness.

Just to illustrate with some real numbers.  Our budgeted sales is expected to be $1 million, but a new campaign we invested in increased sales to $1.2 million:

  • Anticipated FY Sales = $1,000,000
  • Sales after a new marketing campaign = $1,200,000
  • Incremental revenue from Marketing Efforts:  $200,000
  • Margin on Sales = 8%
  • Marketing Investment = $20,000

romi_exUsing the formula above, our ratio would be -0.2.  Since it is a negative, the marketing investment is not effective.  Given that the margin was only 8% on sales, it would have been a more effective marketing effort if the investment had either been less than $20,000, or the increase in incremental sales had been more than $200,000.

In any case, when one is evaluating specific marketing efforts for impact, this is a simple way to ensure that you are achieving positive results for the dollar, specifically as it relates to the eventual margin realized for the business.  Keep in mind that this does not account for other potential benefits of a campaign, such as new customers, increased loyalty or satisfaction.  As such, this approach is more ideally suited for short-team evaluations, rather than a more comprehensive long term analysis.

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