Why We Measure: An Introduction to Marketing ROI

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When it comes measuring the impact and performance of our marketing activities there are generally two simple reasons I like to use for justifying why we invest the time, money and resources in analytics.The first reason for understanding why we measure is to reflect on what we have done (in the past) or are currently doing (in the present) to determine our return on investment. The second reason is to use what've learned to optimise our approach (in the present or for the future) for greater efficiency and impact. Marketing optimisation deserves its own post, which I'll cover another time. For now I want to focus ROI, or more specifically, the return on marketing investment (ROMI).

Return on Marketing Investment Diagram

Your return on marketing investment (ROMI) is an accountability metric for determining the impact of your marketing activities, and is not to be confused with ROI. This may seem pedantic, but I believe it’s an important distinction to make. ROI is a broader business metric which can be defined as your “net profits over the investment needed to generate the profits” (Farris et al, 2010), and it captures the full range of investment within your business or organization; not just marketing spend.

The equation for calculating ROI can be seen in the figure below:

Equation for Return on Investment

Equation for Return on Investment

 In contrast, return on marketing investment (ROMI) is measured quite differently, as it needs to hone in on the specific business value created as a result of your marketing activity. The exact equation can vary depending on your needs and financial structure, but Farris et al (2010) proposed the following:

Equation for return on marketing investment

Equation for return on marketing investment

Indeed, ROMI is a tougher nut to crack, particularly because of the first part of the equation. That is, the “Incremental Revenue Attributable to Marketing”. The process for discovering this is commonly referred to as marketing revenue attribution, which is the process of attributing the various elements of your marketing execution (e.g. Paid Media, .COM, Social Media, etc) to changes in revenue. This is likely going to be the biggest challenge for you in determining ROMI, particularly when it comes to investments in social media (e.g. community management, content planning, etc). Successfully applying this to your organization will require a mix of art (e.g. creative thinking) and science, and will require you to collect, merge, clean and analyse large volumes of disparate data which likely live in different silos. The fundamental principle here is mining your data to gain an understanding of baseline revenue given a $0 marketing spend, and monitoring fluctuations in revenue as you invest in various types of marketing channels. For social media in particular, this will mean that you need to consider the differences between marketing (e.g. paid media or apps built for campaigns) vs overhead spending (e.g. community management).

Make no mistake, getting to a stage where you can attribute your marketing spend and measure ROMI to some level of accuracy is a challenging task. I often see articles, videos and how-to's discussing ROMI which focus on how to construct the equation without properly highlighting the most challenging part of the exercise (i.e. attribution). Indeed, once you have the values for all elements in the equation, plugging in the data and arriving at the answer will be easy. Investing in the right resources and tools to discover those values, however, will not be so simple.

Although this may seem daunting avoiding revenue attribution altogether can be extremely detrimental to how you allocate future marketing spending within your business or organization. On the other hand, embracing this type of analysis can unlock incredible opportunities for generating greater impact on a leaner budget. When you first embark on measuring ROMI, this will typically be done post-campaign as a reflective measure. However, as you become more advanced in this space you can also conduct ROMI measurement in real time if the opportunity and needs align.

For a thorough read on how to go about constructing the ROMI metric for your business, I highly recommend Farris et al’s Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. This book, in my opinion, is one of the most essential resources any analyst, manager or executive involved in marketing analytics can have in their arsenal.