Using Return On Marketing Investment to Optimize Product Marketing
Product marketing is not an exact science by any stretch of the imagination.
However, new ways of objectively measuring and optimizing product marketing effectiveness are significantly changing the game.
One of the biggest questions that marketing leadership is being asked by executive management is this: “What return on marketing investment (ROMI) is the company getting for the money they spend?” The idea of measuring marketing effectiveness and buyer’s response in terms of sales and profits is not new, but terms such as ROMI and “marketing ROI” are used more frequently now than in past periods.
As a product marketing leader, the more you understand ROMI, the more power you will have over your marketing investments.
Improving ROMI is fundamental to optimizing product marketing initiatives.
ROMI can be defined in simplest terms as the contribution attributable to marketing (net of marketing spend), divided by the marketing invested or risked.
It is not like other ROI metrics because marketing does not represent the same kind of investment. Instead of cash that is tied up in plants, inventories or other collateral, marketing funds are risked, and marketing spend is typically expensed in the current period (vs. long-term).
Here’s another way to look at ROMI vs. typical ROI metrics:
“Normal” ROI is a CAPEX model that compares investment in CAPEX to yield. The book value of CAPEX assets retains some value regardless of the yield.
ROMI on the other hand, is an OPEX model that compares non-CAPEX spend to yield. With ROMI, the investment has no retained value and is 100% at risk.
There are two forms of the ROMI metric.
- Short-term (a.k.a. sharp) ROMI
- Long-term (a.k.a. fuzzy) ROMI
Short-term ROMI is 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. The value of the short-term ROMI is in its simplicity. In most cases a simple determination of revenue per dollar spent for each marketing activity can be sufficient to help make important decisions to improve the entire marketing mix.
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.
ROMI can be calculated using different formulas.
One basic formula uses the gross profit for units sold in the campaign and the marketing investment for the campaign:
Gross Profit – Marketing Investment
Alternatively, some companies deduct additional expenses associated with the entire marketing organization’s budget, and to determine ROMI:
Profit – Marketing Investment – Overhead Allocation – Incremental Expenses
You can also use the Customer Lifetime Value (CLV) instead of Gross Profit. CLV is a measure of the profit generated by a single customer or set of customers over their lifetime with your company:
Customer Lifetime Value – Marketing Investment
No matter which approach you and your organization take, solid ROMI calculations will enable you to focus on product marketing initiatives and campaigns that deliver the greatest value.
For example, if one campaign generates a 15% ROMI and the other 50%, it’s easy to see where you should invest your marketing efforts. If the CEO of your company knows that sales will go up $10 million for every $1 million he spends on a particular initiative or campaign, he can quickly determine if additional investment makes economic sense. He can also clearly see the tangible benefits that marketing is delivering to the organization.
ROMI can also provide a measurable way to evaluate and optimize the various components of the product marketing function. For example, the overall positioning, messaging and strategy can be evaluated. Every campaign and digital outreach can be tested for effectiveness.
Everything from packaging to branding can be evaluated for effectiveness.
This continuous process of evaluation, tweaking, and re-evaluation, (sounds like agile, right?) can have the effect of continuously improving the elements that make up the product marketing engine. Optimizing these elements of marketing can yield improvements in sales revenue and market share.
A scientific understanding of the variables that drive sales and profits is essential to determining an optimal product marketing strategy for any corporation. In tough times, companies often slash their marketing budgets. This is a dangerous move since marketing is an investment for producing revenue.