How to Measure Your Marketing ROI ?
Return on Marketing Investment (ROMI) is more of an approach and a model to evaluate various marketing spending rather than a single marketing metric. Its concept is explained in the following formula or equation. Actual application may require elaborate assumptions and calculations.
Return on Marketing Investment is relatively a new metric but rapidly growing in popular mainly due to its obvious promise to measure the ROI, a term favorite to corporate boards, CEOs and CFOs. The measure however, requires quite different approach than a typical ROI calculation carried out for a capital expenditure project.
The ROMI metric is a measure of future promise and requires certain assumptions to be made. While the cost of a campaign or the marketing program is more certain, the main challenge lies in developing assumptions related to the incremental revenue growth expected to come out as a result of the specific marketing investment. Once the revenue stream is identified, it is translated into net profit or cash flows by applying a contribution margin percentage.
If the revenues are spread beyond the current year, it requires applying Net Present Value (NPV) methodology to convert those future cash flows into present values. Finally, the present value of the future generated cash flow is compared with the cash outflow in the form of marketing investment and a ROI % is calculated.
The beauty of ROMI metric is that it can be applied to a variety of marketing campaigns and programs as long as the objective of the investment is to increase sales revenue. The expected revenue increase may generate in the current year or over several years in future. The long term nature of the resulting cash flows, however makes the calculation of ROMI somewhat complicated due to application of NPV approach.