Should ROI for Marketing be High or Low?

Marketing ROI

When I start to work clients, many want to have a high ROI for marketing. But I have found that reality doesn’t bear this out. In fact, the opposite is true - a relatively low ROI is actually better than a high ROI. Companies should aim for a return on their marketing investment that is reasonable and optimal. Let me explain.

ROMI Formula

First, let’s start with the formula for ROI for marketing. Technically, we call this Return on Marketing Investment (ROMI) and the formula is:

Revenue is the dollar value of earnings within a specific time frame (month, quarter or year). This measure can be actual sales or it can be “booked revenue”. Companies that deliver products very quickly typically use sales, e.g. restaurants and most retail operations. On the other hand, companies that take a while to deliver (often B2B) can use the full amount of the booked sale rather than amounts that are invoiced, e.g. home builders, car dealerships, website developers.

Investment is the dollar value of the amount spent on marketing for a specific time period (month, quarter or year). This would include all costs related to buying and managing advertising, marketing, research, software, consultants and media buys.

Here is an example using numbers from one of our clients. In a nine-month time period, they invested $206,924 in marketing and earned revenues of $2,845,898. Using the formula, the ROMI is 12.75. [($2,845,898.83 - $206,924) - $206,924]. We add a $ sign in front to add meaning. We read the number as such, “For every $1 invested in marketing, we generated $12.75 in revenues”. This is a good number - more on this later. 

Alignment

Before we get into contrasting companies with high and low ROMI, let’s look at a bit of theory. I have mentioned Joanne O’Connell in previous posts. She and I are working on a book, tentatively called “A Guide to Intentional Marketing: Measure Twice, Cut Once”. We have developed most of our model.

Recently, we started discussions on the topic of analyzing the numbers that are generated by the marketing metrics system. As you can imagine, there are a bunch of numbers and there are a lot even though we are trying to focus only on KPIs. What we are looking for is a model where we can easily (relatively easily) collect measures (data), calculate the metrics (ratios), and generate marketing statements (reports) that can be analyzed. It is in the step of analysis where we recently made a breakthrough. 

Joanne mentioned to me that when marketing is working well, the product, the marketing and the market are all in “alignment”. As a result, I thought of this diagram:

The Product includes the characteristics of the product (a thing or a service) that the company is offering. This includes specifications, value, quality, warranties, and customer service aspects. The Market is the target audience (people) or niche market that the company is focusing on and ideally, needs the product being offered. In the middle is Marketing which is the connection (communication) between the Product and the Market. Marketing includes pricing, positioning, branding, messaging, advertising, and channel mix. 

If there is alignment then the system can be illustrated as above. If Marketing is out of sync (out of alignment) then the system can be illustrated as such:

There are other variations that will be outlined in our book but for now, let’s just look at these two scenarios. 

Marketing is Out of Alignment

In this situation the product is strong and the Market is strong. Sales should be strong but the company is finding that Revenues are weak. If you recall from previous posts our generic platforms or levels are as follows: 

When the system is out of sync and Marketing is the problem is likely that Investments are low and as a result so are Impressions, Visits, Prospects, Offers, Outcomes and Revenues.

However, ROMI will often be relatively high. For example, if the investment in market (including advertising) is $1,000 it is likely that revenues could be close to $51,000 in a month. In this situation, the company is investing very little in marketing. Using our formula, ROMI for this company is $50. 

When you look into the details, the company is relying almost entirely on word of mouth referrals. This may not sound like an issue but it is. In fact, there are 2 issues. 

First, it is likely that growth is stagnant. In other words, revenues for the company are probably hovering at $600,000 per year and have been for quite a few years. There will be some fluctuation but revenues will be plus or minus this amount year in and year out. Growth is limited. 

The second issue is that the market is strong and yet the company is not selling to meet the demand. In other words, there are buyers who need what the company is offering but they aren’t buying from this company. This situation could be one of the following reasons:

• Lack of awareness

• Lack of trust and confidence

• Lack of understanding of the value

• Lack of incentives

• Competing products that appear to be more attractive

Whatever the specific issue, the bottom line is that the system for Product, Marketing and Market is out of alignment and should be fixed. 

Marketing Is in Alignment

The solution is to look at the marketing that the company is doing, figure out what is working, and bump up the investment in order to maximize growth. If we assume that the product is strong and the market is strong then if more is invested in marketing the system will become aligned. 

The result, as investment increases, is that ROMI will decrease. For example, in a year investment could reach $10,000 per month and the resulting revenues could be $110,000. If this is the situation then ROMI will be much lower at $10 than the previous year [($110,000 - $10,000) / $10,000] but as you can see revenues are much higher as well, and this is what we want. Now revenues for the company are over $1.3 million per year. Wonderful. This is the beauty and the payoff of marketing. 

Marketing As a Percentage of Revenues

Let’s look at this from another angle. Everyone knows that it takes money to make money and in a similar vein, you have to invest money to generate a return. As a result, investment is always going to be a percentage of the return. In the first scenario, the investment was $1,000 and the return (revenues) was $51,000. In this situation, the percentage is 1.96%. Low.

In the second scenario, the investment was $10,000 and the return is $110,000. In this situation, the percentage is 9%. Much higher, BUT annual revenues are much higher!

Conclusion

If ROMI is high it is a good idea to invest more in marketing. If you invest wisely, the ROMI will drop but revenues should increase which is what we want.