A Simple Guide to Return on Marketing Investments (ROMI)

Marketing is a necessary function for businesses to acquire new customers and make their presence known in the marketplace. It involves running campaigns that include ads, nurture programs, events, webinars, social media, etc. To be relevant across all these engagement touchpoints costs money and effort. ROMI helps businesses make data-driven strategies to minimize costs and maximize profit. In simple terms,

Return on Marketing Investments (ROMI) is about attributing revenue to justify the spending from your marketing activities with profitable returns.

Why ROMI is important?

Understanding the return from your marketing activities/campaigns helps marketers know their customer acquisition costs breakdown, identify cost-effective channels, make decisions on future budget allocation, establish future baselines for campaigns, and justify the spending across teams and tactics.

Return on Marketing Investments (ROMI) formula

To calculate ROMI, you need to have visibility into your sales pipeline. ROMI is not to be confused with ROAS. Return on your marketing investment is directly related to the profit generated from your marketing activities, in other words, incremental growth from marketing activities. A simplified version of the above formula is;

How to calculate ROMI?

In a simple example, if your total cost of running a marketing campaign was $300 and the campaign resulted in a $1,000 growth in sales. Then your return on investments (ROI) is;

{( Sales growth – Marketing spend ) / Marketing spend } x 100

= {($1,000 – $300) / $300} x 100

= ($700/$300) x 100

= 2.33 x 100

= 233% is you ROI (Return on Investments)

To calculate the real impact of your marketing activities, you have to factor in the natural revenue growth and exclude that from the total revenue generated. Taking from the above example, if your business generates 16% ($160) of total revenue organically or without any marketing intervention, then your return on marketing investments (ROMI) is;

{( Sales growth – Organic sales – Marketing Spend ) / Marketing Spend } x 100

= {($1,000 – $160 – $300) / $300} x 100

= ($540/$300) x 100

= 1.8 x 100

= 180% is your actual ROMI (Return on Marketing Investments)

What is a good ROMI?

A 5:1 ratio (500%) is considered the baseline of good returns on marketing investments, and anything below a 2:1 ratio (200%) is considered not profitable. Often companies that generate less than 200% ROMI end up break-even with all the expenses due to the cost of delivering the products/services.

Since every organization is different and each industry has its own margins, sometimes a lower ROMI ratio could also make huge profits for an organization. If your services/products cost you less than 60% of your sales price, you are on the safer side even if your ROMI ratio is below 2:1.

Conclusion

It is necessary for all sizes of businesses to calculate some form of return on investments. This helps you identify challenges, make strategic decisions around future investments, set clear goals, perform competitive analysis and product viability in the market, and build brand equity while not wasting a budget that could be better utilized in other profitable channels and strategies. understanding the different types of marketing campaigns, and establishing successful measurement plans in place is the first step toward calculating return on marketing investments (ROMI).