Are you having trouble justifying your marketing plans and budgets to the CEO? Are they bugging you with accountability issues and results? These questions are often scribbled in your expensive worn-out leather planner.
As you work your way in increasing your value to the company and hopefully increase your pay and bonus, you can’t avoid dealing with the most important factor in the financial realm of every organization . . . scoring in the return on marketing investment. Since marketing is already the single largest expense for most companies, it becomes the center of attention in the financial division. Return on marketing investment or simply ROMI is one thing your CEO wanted to discuss with you when you present your marketing plan. While marketing campaign is important piece of your plan, many companies demand to know more about the expected and realized return of investment. It always ends with “what’s the return?”
While marketing expenditures require a clear and concise justification, still some marketers proceed without a clear goal in mind. They continue spending without the ability to measure the definite success. “They are made with no clear connection between them and the goal of generating more sales. They are simply made with the hope that more sales will come in the future. Often they are made because the marketing people want an ad that makes them look good. They want a product slick that simply shows off their design and creative talents,” excerpts from Guy R. Powell in his book ‘Return on the Marketing Investment’. Powell defines ROMI as “the revenue (or margin) generated by a marketing program divided by the cost of that program at a given risk level.”
The Elements Of ROMI
- Expenditure or investment
- Hurdle rates
The projected results (returns minus costs) must exceed a certain investment hurdle rate for a given level of risk. The difficulty of comparing investments in marketing with other more operational investments is that marketing investments lead to more sales. Compared with other investments that generate exactly the same profits, investments that generate higher revenue are more highly valued than those generating the same level of profit through reduced costs. Remember, marketing budget is not a given. You must look after marketing as a sound business investment. The company ask you to defend the marketing budget and bottom-line terms, and marketing spending is considered a budget column not to be taken for granted, nor should it be! Marketing is an investment but unless you can effectively communicate the bottom-line of your marketing spending, you face losing your budget and the confidence of your management.
Marketing budget must be made with a clear goal in mind, supports the financial goals of the company. It generates brand recognition, that will later drive more revenue. Marketing budgets are investments that will lead to future sales.
THE ROMI CALCULATOR
NUMBER OF IMPRESSIONS x EXPECTED RESPONSE RATE = LEADS GENERATED PER YEAR x LEAD-TO-PROPOSAL % = NUMBER OF PROPOSALS x CLOSE RATE = NUMBER OF CUSTOMERS x ANNUAL CUSTOMER VALUE = REVENUE – TOTAL MARKETING EXPENSE = ROI.
Compute how many leads your program should generate how many customers you should convert, and therefore your return on investment. To calculate your marketing plan’s expected ROI, you need to compile the following information in your ROI calculator:
Marketing Vehicle Used. Include all marketing expenses. Take every marketing vehicle such as labor (both in-house and out-source staffing), brand awareness activities (public relations, advertising, product presentations, event marketing), marketing communications (broadcast, print, radio and web), CRM and direct marketing activities (direct mail and email, socialmedia), and promotions (loyalty programs, in-store promotions, rewards and incentives.)
Number of Impressions Made. Enter the number of impressions for each marketing vehicle each month. Impressions are the measure of the size of the audience for every vehicle used in certain time. How many readers will read your ad or press release published in each publication? How many attendees and participated in your event marketing? How many loyal customers involved in your rewards or incentive programs? How many flyers or brochures distributed? These are the things you need include in the expected impressions for a vehicle. If you can’t quantify it, use “0” as the number impressions and include its cost in your equation.
Expected Response Rate. Response rate refers to the ratio of number of audience who answered/participated in your marketing vehicle divided by the number of targeted audience. It is usually expressed in the form of a percentage. Some marketers used their existing metrics. If you do not have a benchmark, you will need to make a conservative estimate based on your best guess or better yet hire a consultant to guide you.
Annual Cost. Calculate the annual cost for each implemented vehicle.
Average Lead to Proposal Ratio and Average Close Rate. This is the percentage of leads that become proposals on average. You will also need to know your company’s average close rate (the average percentage of proposals, bids, or cost estimates that you win.)
Average Annual Customer Value or Sales. Calculate (or at least get the estimate) the average annual customer value in terms of the average sales per customer per year.
THE BALANCE SCOREBOARD.
With the stir to financial accountability in marketing operations, it’s now more important than ever to measure the investment and returns in your brand over time. Learn to confidently optimize your marketing plan by balancing marketing science with art, experience and intuition—with measurable results! Translate marketing efforts and activities into financial opportunity on-demand and on an on-going basis. Identify and quantify the business value of every marketing effort, constantly adjust and optimize marketing spend, while at the same time justify and secure marketing budgets. Just like in any investments, it is essential to understand and plan where the financial return from increased sales is expected for each investment.
Understanding and using ROMI is the key to implementing more effective marketing campaigns that positively affect the bottom-line. It is a means for confirming your marketing intuition and presenting your ideas in finance terms. It is no longer pretty graphics and big ad budgets. Marketing must be run like a manufacturing plant with accurate schedules, high quality production and results measured in revenue. Your marketing plan must show its’ accountability and ability to measure the definite success.
ABOUT THE AUTHOR
Justine Castellon is an independent brand strategist and a marketing author. She provides creative thinking and interpretation of consumer and market insights.
| Follow her at www.twitter.com/justcastellon
[published in AD EDGE Magazine]