It’s no secret that businesses spends a lot on marketing. But is all that money spent well? Does marketing actually work ?? Marketers are under more and more pressure to ‘show a return’ on their activities.
If you are a marketer and you are about to start planning a new campaign,the most basic thing that will come in your mind is, what would be the returns on investment I am making in this marketing campaign? The focus will be on increasing it.
Marketing Analysis can help answer those questions !
Let’s start with the basics first .
So what is the Return on marketing investment(ROMI) ?
The contribution to profit attributable to marketing (net of marketing spending), divided by the marketing ‘invested’ or risked. In simple language Marketing ROI is a way of measuring the return on investment from the amount a company spends on marketing.
The idea of measuring the market’s response in terms of sales and profits is not new, but terms such as marketing ROI and ROMI are used more frequently now than in past periods. Usually, marketing spending will be deemed as justified if the ROMI is positive.
The purpose of ROMI is to measure the degree to which spending on marketing contributes to profits.). It can be used to assess the return of a specific marketing program, or the firm’s overall marketing mix.
Following are some benefits of measuring marketing ROI
· Justifying marketing spend
Marketing is a significant expense for most companies, and leaders want to know what they’re getting for it but marketing does indeed have an impact on the profitability of the firm.
· Deciding what to spend on
MROI is calculated for particular campaign or program to know about the respective return on spending. At the same time we need to find which campaign is giving higher ROI ,so in future we will know where to invest more and allocate budgets accordingly.
· Comparing marketing efficiency with competitors
Track competitors’ MROI to gauge how your company is performing against others in the industry.
· Holding themselves accountable
Good marketing is not about winning creative awards or telling interesting stories. It’s about delivering customers and sales. Measuring how efficiently the marketing organization is using the company’s money keeps everyone accountable for using those funds wisely.
How Do You Calculate MROI?
So the simple formula is as follows :
Aim is to achieve positive number and as high as possible.Some companies establish a threshold for MROI that takes into account its risk tolerance and cost of capital, below which they are hesitant to make investments. If you end up with a negative ROI, the project is harder to justify on financial terms.
What Are the Challenges of Calculating MROI?
· The formula might look simple but use of it in actual scenario is complex.
· It often becomes difficult to decide which expenditures to include. The MROI of social media activity often looks very high if you only count financial resources, but if you look at the human resources required to develop content and respond to consumers’ posts 24/7, the number goes down.
· Managers should try to estimate the full cost of the marketing activity, including creative development, media spend, and customer-facing staff time.
· You need to establish your sales baseline. The baseline is hard to establish in a dynamic marketing environment. Usually companies look at their historical data and project them into the future.
· Measuring the lag time associated with most marketing spending is another common challenge. If you spend today, it might take three years for the marketing to ‘work’ and for the consumer to make a purchase, especially with products, like cars, that are purchased less frequently.
· Most companies are using a mix of programs to persuade consumers. So it can also be difficult to figure out which incremental profits are attributable to which programs.
What Mistakes Do Companies Make When Using MROI?
·One of the downsides of marketing ROI is that it is easy to only recognize the incremental profits in short-term sales and underestimate the long-term benefits that marketing brings to brand value.
· This can be particularly challenging for executives who might be impatient to see a return. A CFO might just see marketing expenses walking out the door and not a corresponding build-up of cash flows and assets.
· CFOs are under tremendous pressure to deliver quarterly earnings, and may not be patient for the longer-term effects of marketing to take hold. You’re asking them to believe in forward movement in a progression through a customer’s purchase journey, and that can take a long time.
· But marketing does more for a company than generate profits in the short term; it also builds lasting value and drives future profits.The key is to remember that while marketing expenditures hit the P&L immediately, every dollar you spend today is building your brand as an asset for the future. So, ideally your marketing program is not only affecting sales and profits this year but also strengthening your brand equity and customer relationships over time.
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