ROMI is the amount of money a company has earned in response to a specific marketing campaign. Short-term and long-term returns require different calculations, and long-term returns are harder to calculate due to variables such as brand awareness and word-of-mouth advertising.
Simply put, a return on marketing investment, known as ROMI in the accounting world, is the amount of money a company or business has earned in direct response to a specific marketing campaign. It is most often presented as a percentage or rough estimate and is often used as a template for measuring the effectiveness of marketing campaigns. Analysts often study patterns and trends as a tool when developing new branding strategies as well. In most companies, marketing – which includes advertising and any number of expenses generated by sales – is a very expensive undertaking, and the costs are often spread across multiple campaigns and initiatives. It can be difficult for companies to verify their true effectiveness, and that’s where ROMI comes in.
Understanding marketing returns in general
Marketing returns are generally divided into two types: short-term returns and long-term returns. In general, short-term returns are relatively easy to calculate, but long-term returns are more intangible and therefore more complex. Among other things, this means that short-term and long-term returns require different calculations and take different socioeconomic and marketing factors into account.
A short-term return on marketing investment is usually looking to test the value of a single marketing campaign or the value of multiple campaigns for a single product or service. Something like a flyer campaign for a new brand of mail order detergent or a series of billboards and print ads for a local restaurant are simplified examples. The cost of the marketing campaign as a whole would be relatively easy to calculate under both scenarios, and any immediate increases in sales and profits could be more realistically attributable to these efforts. Things can be much more difficult with multiple strategies for multiple products and services over a longer period of time, in part because it becomes increasingly difficult to correlate specific marketing efforts with consumer behavior.
basic formula
The main formula is usually taught as gross profit minus investment divided by investment. If a flyer campaign costing $250 dollars (USD) generated $1,200 in sales for an item costing $900 to produce, there would be a gross profit of $300. 250 of the campaign equals $50; divided by $250, this gives you a return on marketing investment of 0.2 or 20%.
Basically, this number means that every $10.00 spent on the ad campaign creates an additional $2.00 net profit. If the campaign only generated $600 in sales for $200 in gross profit, the ROMI would be calculated to be less than 20%, which means that the company actually lost money because it cost more for the flyer campaign than the campaign ran in the gross profit .
Including profit and investment
The most difficult element of this equation is calculating the additional profit and cost of the investment. In the example used above, brand awareness only comes from flyers, but most marketing campaigns use a variety of methods, including but not limited to television commercials, radio spots, newspaper ads, and advertisements on social media sites. . Companies often don’t know exactly how much new revenue is generated by a particular marketing method, and even making an educated guess is often really difficult.
This means that the sales and marketing departments are left to calculate profit and investment. This calculation requires cost of goods sold (COGS) and cost of producing the campaign. Marketing requires research, production, labor, and placement costs. This becomes more complicated with sophisticated marketing campaigns, multiple products and multiple sales strategies.
Long term considerations
A disadvantage of short-term marketing ROI estimates is that they do not take long-term returns into account. Long-term returns are harder to calculate because they include things like brand awareness, impulse buying, and word-of-mouth advertising. Long-term metrics results are less reliable because there are too many variables involved. Even so, they are considered useful when it comes time to create new campaigns or determine whether a particular type of marketing strategy is likely to be worth the initial costs. There are never guarantees, but strategies with a history of favorable returns, even if those returns cannot be accurately calculated, are usually the most repeated.
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