Return on marketing investment

Return on marketing investment (ROMI) is the contribution to profit attributable to marketing (net of marketing spending), divided by the marketing 'invested' or risked. ROMI is not like the other 'return-on-investment' (ROI) metrics because marketing is not the same kind of investment. Instead of money that is 'tied' up in plants and inventories (often considered capital expenditure or CAPEX), marketing funds are typically 'risked'. Marketing spending is typically expensed in the current period (operational expenditure or OPEX).

The idea of measuring the market's response in terms of sales and profits is not new, but terms such as marketing ROI and ROMI are used more frequently now than in past periods. Usually, marketing spending will be deemed as justified if the ROMI is positive. In a survey of nearly 200 senior marketing managers, nearly half responded that they found the ROMI metric very useful.

The purpose of ROMI is to measure the degree to which spending on marketing contributes to profits. Marketers are under more and more pressure to "show a return" on their activities.

The relatively young ROMI concept first came to prominence in the 1990s. The phrase "return on marketing investment" became more widespread in the next decade following the publication of two books Return on Marketing Investment by Guy Powell (2002) and Marketing ROI by James Lenskold (2003). In the book "What Sticks: Why Advertising Fails And How To Guarantee Yours Succeeds," Rex Briggs suggested the term "ROMO" for Return-On-Marketing-Objective, to reflect the idea that marketing campaigns may have a range of objectives, where the return is not immediate sales or profits. For example, a marketing campaign may aim to change the perception of a brand.

A necessary step in calculating ROMI is the measurement and eventual estimation of the incremental sales attributed to marketing. These incremental sales can be 'total' sales attributable to marketing or 'marginal.'

There are two forms of the Return on Marketing Investment (ROMI) metric.

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 incremental margin for $100,000 of marketing spent) is $300,000 (= $500,000 x 60%). Of which, the $100,000 spent on direct mail advertising will be subtracted and the difference will be divided by the same $100,000. Every dollar expended in direct mail advertising translates to an additional $2 on the company's bottom line.

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