Reviewing the Definitional Issues of ROMI

Ted Mitchell

Marketers Need ROMI or MROI

• To justify the expenditures made on marketing activities

• Marketing expenditures include• The dollars spent on servers. quality coffee,

creating ambiance, radio spots, etc.• The dollars spent on building awareness,

customer value, customer satisfaction, customer life time value

The Two Confusing Definitions of ROMI

• Return on Marketing Investment• 1) The Percentage Return on Marketing• 2) The Percentage Rate of Return on

Marketing• The Definitions hinge on • 1) the meaning of the term ‘investment’• 2) the description of what is being returned

Return on Marketing Investment

• Is a ratio with a constant value, ROME, that defines the Direct Relationship between two marketing variables

• (Output, O)/(Size of Investment, E) = ROME• The slope-origin form of a Direct relationship is

useful for explaining and predicting marketing performance

• Performance, O = ROME x (Size of Investment, E)

The confusion starts with

• the definition of the variables involve• 1) What is the Investment?• The number of servers hired, the quality of

the coffee used, the number of radio spots• The amount of money being spent on

marketing activities, $E

The confusion continues with

• 2) What is the thing being returned?• The number of things being sold, the number

of new transactions, the number of returning customers

• The amount of Sales Revenue being generated, $R

• The amount of Marketing Profit being generated, $Z

The Confusion continues

• With the definition of the conversion rate, r, being discussed as percentages

• Percentages are abstract, context free conversion rates created when the output and the input are measured in the same units e.g., Dollars, Customers, etc.

• 1) Percentage Return on Marketing Expense, %E• 2) Percentage Rate of Return on Marketing Expense. %∆E

The First Definition is

• Percentage Return on Marketing Expense, %E• It is part of the definition of a Direct

relationship between dollars of sales revenue, $R, and dollars of marketing expense, $E

• The ratio of $R/$E = %E which is a constant value (The dollars cancel out to be a %)

• As a Two-Factor model it is the equation• Revenue, R = %E x Marketing Expense, E

Input Factor, I

Output, O

0, 0Marketing Expense, $E

Revenue, $RX

Point of Observation

($E, $R)

Constant Percentage

Conversion Rate or Percentage

Returned, %E = R/E

Slope-Origin Equation for Two-Factor

Marketing machine$R = %E x $E

Example

• You have ‘invested’ E = $2,500 in server wages and training and your sales revenues were $10,000.

• What is your ‘Return on Marketing Investment’?

• What is your Sales Return on Marketing Expense, ROME?

• %E = R/E = $10,000/$2,500 = 400%

The Second Definition is

• Percentage Rate of Return on Marketing Expense, %∆E

• It is part of the definition of a Direct relationship between dollars of marketing profit, $Z, and dollars of marketing expense, $E

• The ratio of $Z/$E = %∆E which is a constant value (The dollars cancel out to be a % of change)

• As a Two-Factor model it is the equation• Marketing Profit, Z = %∆E x Marketing Expense, E

The Key to the Second Definition

• Is the Definition of Marketing Profit, $Z• Marketing Profit is the difference between the

amount of revenue, $R, generated by a marketing expense, E, minus the dollar cost of the marketing expense, E

• Profit $Z = $R – $E = ∆E (difference from E)• The ratio of the Profit, Z, to the marketing expense,

E, has a constant percentage rate of return• Z/E = ∆E/E = %∆E

Input Factor, I

Output, O

0, 0Marketing Expense, $E

Marketing Profit, $Z = $R –$EZ = ∆E

X

Point of Observation

($E, $Z)

Constant Percentage

Conversion Rate or Rate of Return,

%∆E = ∆E/E

Slope-Origin Equation for Two-Factor

Marketing machine$Z = ∆E/E x $E

A Second Example

• Last week you invested $8,000 on marketing activities such as advertising, server salaries, etc. Your sales revenues were $10,000. What is your Rate of Return on Marketing Expense, ROME?

• Profit, Z = R – E = $10,000 - $8,000 = $2,000• Your Rate of Return on Marketing Expense

RoROME = Z/E = ∆E/E = %∆E = $2,000/$10,000• ROMI = 20%

The two definitions of return are confusingly similar

• 1) Percentage Rate of Sales Revenue Being returned on Marketing ExpensePercentage Sales Return

• 2) Percentage Rate of Profit Being returned on Marketing ExpensePercentage Rate of Return

• When most managers refer to the Return on Marketing Investment, ROMI, they are referring to the second definition

Any Questions?

• On The Confusing Definitions of • Return on Marketing Investment• Marketing Return on Investment• Return on Marketing Expense.