Marketing is all the things that keep companies bringing in customers. How effective an investment in marketing is determines the success of the retail business as a whole. The metric ROMI – Return on Marketing Investment – helps measure the effectiveness, or profitability, of an investment in marketing. It’s a universal indicator for determining the profitability of all financial efforts to promote a business. Unlike another similar indicator, ROI, or Return on Investment, ROMI shows the success not of all advertising channels as a whole, but each separately. And this makes the metric more informative. You could say that ROMI is a measure of the return on investment of specific advertising/marketing tools. Its universality lies in the fact that the effectiveness of marketing is assessed without taking into account related factors, such as the seasonality of demand for goods, the cost of renting premises and employee compensation. All these factors make ROMI useful for any business, be it a gambling website https://www.spinia.com/en-CA or a huge marketplace with products used on a daily basis.
ROMI can be applied in two strategic decisions – short-term and long-term ROMI. Short-term shows the effectiveness of each ruble invested in a particular customer attraction channel. Long-term shows how much marketing adds value to the overall brand promotion process.
A merchandise business operates primarily with short-term ROMI. Let’s understand why we need to calculate this indicator, what its pros and cons are, and how we can grow ROMI.
Marketing Costs and Their ROMI Evaluation
All financial means that are invested in advertising and promotion are considered as marketing costs. For example, these can be costs:
- For maintaining pages/promotion of the store in social networks.
- The creation of an online store and its SEO-promotion.
- Contextual advertising.
- Targeted advertising.
- Email notifications.
- Push notifications in messengers and in the browser.
- Internal promotion on the marketplace.
The general approach to evaluating the profitability of marketing investments is as follows:
- ROMI is greater than 100%. Finance, invested in advertising and promotion, paid off and brought a high income.
- ROMI is equal to 100%. Marketing investment is paid off; the company earned revenue of double the amount it spent on advertising.
- ROMI is less than 100%. Advertising costs brought a relatively small income.
- ROMI is 0%. Marketing is at a break-even point – there is no income, but there is also no loss.
- ROMI is negative. The company made a loss, marketing investments are unprofitable.
Why Count ROMI
It’s paramount for merchants, including those in the e-commerce sector, to calculate ROMI, as it will be one of the key indicators of business performance. Especially when it comes to selling mass merchandise with a short transaction period. Online clothing stores are much more important to calculate ROMI than, for example, companies that sell home building services, because in the case of selling a complex and expensive product with a long transaction cycle, this indicator won’t be informative.
Strategically, the point of calculating ROMI is to determine if marketing is profitable or unprofitable. And if you decompose this key task into smaller ones, you can use ROMI:
- Evaluate the effectiveness of individual promotion channels.
- Evaluate the success of temporary promotional activities such as Black Friday or local sales.
- Reconsider the set of advertising tools and channels.
- Redistribute the advertising budget so that it generates more revenue.
- Predict the profitability of each channel in the future with an increase or decrease in investment.
- Test new promotion channels.
- Compare the profitability of investments in different channels.
- Better understand the interests of the target audience and refine the tools to reach it.
- Evaluate the work of the promotion and sales departments.
- Prepare informative and convincing reports on the refinement of the marketing strategy for the management of the business.
Advantages and Disadvantages of ROMI
Just as there is no silver lining, there are no tools or metrics that consist only of pluses. ROMI is no exception, this metric also has a bright and a dark side.
- A relatively simple formula. With analytical data, ROMI can be calculated not only by a marketer, but also by a small business owner who does not yet have such a specialist on staff.
- Variability. With ROMI you can calculate, for example, the breakeven point for each marketing channel, or the maximum amount of clicks on advertising, in which investments will be profitable.
- Informativeness. No matter how this metric is calculated, it will show the return on advertising – which is extremely important for a retail business.
- Some superficiality. As we wrote above, the ROMI completely ignores non-promotional business expenses, such as manufacturing or purchasing costs. If you use only this formula to estimate the overall profitability of a business, you can get a picture that is noticeably different from reality.
ROMI must be counted periodically, not once, but periodically – but this applies to all economic indicators. So does the fact that virtually all marketing metrics are related to the human factor. For example, if immediately after the launch of an advertising campaign in a new promotion channel the top sales manager quit, this may decrease ROMI, but the decrease will have nothing to do with the quality of the advertising campaign itself.
How to Increase ROMI
Some practical tips:
- Redistribute the advertising budget. Turn off ineffective promotion channels, invest in those that bring maximum profit. This way, even without increasing the advertising budget, you can get significantly more profit.
- Track the customer journey. All touches, from first to last, should be recorded and analyzed in order to understand where and how you can strengthen the sales funnel. Identify at what stage of the funnel people are leaving, what is preventing them from making a purchase, and eliminate the identified obstacles or shortcomings.
- Refine your advertising creatives. All advertising messages should be relevant to your target audience to drive more traffic, reduce the cost per click and the overall cost of attracting a customer – ROMI will then increase.
- Optimize the usability of your online store. This way you won’t lose interested users who are ready to buy if they fail to find out how and what to look for on the website or how to arrange and pay for their purchase.
- Eliminate technical errors in the operation of the online store. Long page loads, unloaded images, and incorrectly displayed pages on mobile devices lead to a loss of users, and fixing these issues will help increase conversion rates.
- Work on getting conditionally free organic traffic. Invest in high-quality SEO, expand the semantic core with key phrases that can bring in new customers, and bring the site to the top positions in search results for thematic requests.
- Build comfortable communications. If the user leaves at the stage of order placement and communication with the manager – communication should be improved. Sales managers should have full knowledge of the products and services offered by the online store, and communicate with users in a competent and interested manner.
- Increase the effectiveness of the sales department. For example, it’s important to decrease the amount of time you have to call/wait for a manager to answer you – this can increase sales, and with it the ROMI.
- Try different channels to attract customers. Maybe the channels you are not using right now will give you the best response and the biggest profit – they need to be tested.
- Work on increasing your average check. Use upsells (offering more expensive and functional products or more product volume), cross-sells (offering related products) to sell to a single customer for more money.
ROMI is the return on marketing investment, or advertising and promotion spending. The metric is most commonly used in businesses whose results are not tied to variable costs, i.e. merchandise businesses, including e-commerce. ROMI is an important metric that provides a lot of information for analytics and allows you to manage your marketing budget more effectively. It isn’t the only, but a must-have tool for the marketer. ROMI should be calculated periodically, given the length of time it takes to make a decision and the actual timing of the return on marketing investment. The most important thing to calculate ROMI is to collect complete analytics, including the customer journey, and not to mix this metric in calculations with ROI.