Stop Calculating ROI for Your Campaigns and Focus on ROMI Instead.

Source: Image generated with AI (Dall-e).

Measuring Return on Investment (ROI) has been the preferred tool for evaluating the effectiveness of various marketing investments. However, its use can lead to misinterpretations. This is where Return on Marketing Investment (ROMI) emerges as a more precise and revealing alternative.

Below, I describe what, in my opinion, are the most common errors when using ROI instead of ROMI. Practical recommendations for using the latter are offered, along with illustrations through concrete examples of its calculation in various scenarios.

Common Errors When Using ROI Instead of ROMI

Error 1: Measuring return with total revenue instead of contribution margin

The most common mistake when using ROI is measuring the return on marketing investment using total revenue sales without deducting associated direct costs. This approach overlooks the fact that direct costs can vary significantly between products or services, distorting the comparison of efficiency between different investments. For example, a marketing manager discusses with their agency the results of a social media campaign that generated $90,000 in sales with “just” a $20,000 investment. In their ROI calculation, the agency claims a 350% return or that the return was 3.5 times the amount invested in advertising, thus declaring the campaign a success.

However, by ignoring direct costs or the category or brand’s own gross margin, the ad agency fails to realize that the campaign may have been a disaster.

Suppose this campaign was for a consumer electronics product (computers, cell phones, televisions, etc.); in this category, retailer margins hover around 15% on revenue, meaning that after deducting costs, the retailer is left with only 15% of their revenue, which for our example would be $13.500 gross margin. So the true return on the marketing investment (ROMI) would actually be -33%, or in other words: for every dollar invested in advertising, one-third was lost.

On the other hand, in a category where margins are not as tight, for example, if the gross margin was 65%, the ROMI would be 193%, and it would depend on the magnitude of fixed operating expenses whether the result could be considered good or bad.

By the way, the following is the formula for calculating ROMI:

Error 2: Applying ROI as a success indicator in branding campaigns

ROI should be used exclusively when it is possible to directly link the investment to a short-term increase in sales. Branding campaigns, however, often have longer-term effects, making ROI an inadequate metric for measuring their immediate impact.

When the branding campaign extends over time, determining its positive impact in short periods becomes very complex; similarly, we cannot assert that a decrease in sales this month is due to a bad branding campaign that started this same month (it might be, or it might not be). So it is better to refrain from using measures like ROI to determine if these types of campaigns are effective or not.

Error 3: Ignoring the cost of other marketing actions

Omitting the cost of complementary tactical actions, such as discounts or sales incentives, can lead to an underestimation of the true cost of marketing activities. By using ROI as a success indicator without including these additional expenses, there is a risk of overestimating the investment’s profitability.

Consider this: in most practical scenarios, the marketing manager resorts to more than one tactic to boost sales, not just advertising. A price decrease, via discount, plus the advertising required for its communication, is an example; similarly, if the commission to distribution channels is increased to achieve greater exposure at the point of sale, etc. All these actions have a short-term effect on sales. And while it is complex for the marketing manager to measure their effectiveness in isolation, the difficulty in measuring the effect separately cannot be an excuse for measuring the campaign’s return only considering advertising.

The difficulty in measuring the effect of different tactics separately cannot be an excuse for measuring the campaign’s return by only considering advertising.

That’s why above, when exposing the formula, it talks about “marketing investment,” which refers to the combined cost of different tactical actions to measure, through ROMI, the ability to generate contribution margin.

Recommendations for Using ROMI with Practical Examples

To overcome these challenges, it is recommended to adopt ROMI, which provides a more accurate measure of marketing investment performance. Unlike ROI, ROMI focuses on gross margin also known as contribution margin, i.e., sales revenue minus direct costs, adjusted for marketing investment.

Practical Example 1: Digital marketing campaign

Consider a digital marketing campaign for a product with a 65% gross margin. After a $20,000 marketing investment, sales revenue increased by $90,000. Deducting direct costs, the contribution margin would be $58,500, resulting in a ROMI of 193% (or 1.93 times the marketing investment), a more precise measure of profitability than the simple calculation of ROI based on total revenue.

Practical Example 2: Launch of a new product

For the launch of a new product, a total marketing investment of $100,000 is made, including advertising, discounts, and additional commissions. After the campaign, sales revenue reached $500,000 with an average contribution margin of 65%. ROMI calculation would reveal a return of 225%, considering all associated costs, providing a more comprehensive perspective of the combined effectiveness of the investments made.

Conclusion

Using ROMI instead of traditional ROI offers a clearer and more precise view of the effectiveness of marketing investments. By avoiding common errors associated with calculating ROI and adopting a more holistic approach that includes all direct and additional costs, companies can make more informed decisions about their marketing strategies. The key is to maintain a consistent methodology and adjust tactics based on a detailed analysis of the results obtained, which will eventually lead to continuous optimization of campaigns and improved investment profitability.

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