Return On Marketing Investment: An attempt to calculate ROMI

Overview

Performance measures have been used to assess the success of organisations. The modern

accounting framework dates back to the middle ages and since that time assessment of

performance has predominantly been based on financial criteria (Burns, 1998). Double entry

accounting systems were developed to avoid disputes and settle transactions between traders

(Johnson, 1983). By the start of the twentieth century the nature of organisations had evolved

and ownership and management were increasingly separated. As a result, measures of return

on investment were applied so that owners could monitor the performance that managers

were achieving (Johnson, 1983). Since that time the vast majority of performance measures

used have been financial measures of this type (Kennerley & Neely, 2003).

An important task of marketing research is to assess the efficiency and effectiveness of

marketing activities. Marketers increasingly are being held accountable for their investment

and must be able to justify marketing expenditures to senior management. In a recent

Accenture survey, 70 % of marketing executives stated that they did not have a handle on the

return on their marketing investments. Another study revealed that 63 % of senior

management said they were dissatisfied with their marketing performance measurement

system and wanted marketing to supply prior and posterior estimates of the impact of

marketing programs. With marketing costs already high and continuing to rise, senior

executives are tired of seeing what they consider to be wasteful marketing failed new product

and lavish ad campaigns, extensive sales calls, and expensive promotions that are unable to

move the sales needle (Online – Citeman network).

This created a need to calculate marketing investments. Return on Marketing Investment

(ROMI) can be defined as the ratio measure of profit (return) to marketing investments

(advertising and promotion expenses) used to produce that profit achieved by a firm through

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its basic operations. ROMI is an indicator of marketing management's general effectiveness

and efficiency (Decision Analyst.com). Guy. R. Powell also defined it as the revenue

generated by the marketing program divided by the cost of that program at a given risk level.

Marketers employ a wide variety of measures to assess marketing effects. Marketing

metrics is the set of measures that helps firms to quantify, compare, and interpret their

marketing performance. Marketing metrics can be used by brand managers to design

marketing programs and by senior management to decide on financial allocations. When

marketers can estimate the dollar contribution of marketing activities, they are better able to

justify the value of marketing investments to senior managements (Online – Citeman

network).

Many marketing metrics relate to customer-level concerns such as their attitudes and

behaviour; others relate to brand-level concerns such as market share, relative price premium,

or profitability. Companies can also monitor an extensive set of metrics internal to the

company. One important set of measures relates to firms innovativeness. For example, 3M

tracks the proportion of sales resulting from its recent innovations. Another key set relates to

employees (Online – Citeman network).

Amazon.com is a firm renowned for constantly monitoring its marketing activities. Their

CEO wants to know average customer contacts per order, average time per contact, the

breakdown of e-mail versus telephone contacts, and the total cost to the company of each.

The man in charge of Amazons customer service and its warehouse and distribution

operations looks at about 300 charts a week for his division (Online – Citeman network).

Firms are also employing organizational processes and systems to make sure that the

value of all of these different metrics is maximized by the firm. A summary set of relevant

internal and external measures can be assembled in a marketing dashboard for synthesis and

interpretation. Some companies are also appointing marketing controllers to review budget

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items and expenses. Increasingly, these controllers are using business intelligence software to

create digital versions of marketing dashboards that aggregate data from disparate internal

and external sources (Online – Citeman network).

Literature Review:-

“Marketing must ensure that finance doesn’t view it as a discretionary expense, but as a

value driver, or an investment. That makes it harder for budget changes to be justified. It is

uncommon for the marketing budgets to be seen as a growth driver. Marketing departments

need to prove that they have to prove that the money that they spend is logically utilised and

obtains ROI” (Steering group, CIM. 2001). At times of economic disturbances it becomes

important for all the departments to be accountable for the expenses that they do. This

introduces the need for measurement, as without measurement it is impossible to be

accountable. “For firms to measure the return on marketing, it is essential for them to treat

marketing expenditures as an investment” Schultz & Gronstedt, 1997. “Traditionally many

firms have viewed marketing as a short-term expense (Rust, Lemon, & Zeithaml, 2004) to be

indulged when finances are plentiful, and cut in times of hardship. This led top managers to

constantly evaluate their strategic marketing initiatives (Roland et al, 2004). However, only

through treating marketing expenditures as an investment can marketing be compared to

other tangible and intangible assets enabling the marketing function to play a role in the

strategy of the firm (Schultz & Gronstedt, 1997).” Moorman & Rust, 1999. This can be a

method where in marketing can settle down its financial claims from the finance department.

Most of the investment spend is on marketing activities are in advertising, customer

satisfaction etc. so that people are aware of the products and services that the organisation can

provide them. “Investments in marketing must yield significantly greater returns than taking

the same money and investing it in more sales personnel. Most of the marketing expenditures

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made are not connected from sales and their main aim is to ‘get the word out’ but not to drive

revenue” Guy R Powell, 2002.

Service companies used traditional direct marketing and advertising tools which included

direct mail, yellow page advertisements and radio or television advertisements which had

both benefits and dis-advantages; they provided with limited scope being economical or

having larger scope but were expensive. Advances in internet technology created a new tool

for direct marketing and advertising which were cost effective and target specific Roxas et al,

2000. The application of direct marketing requires a fully integrated approach, and that the

company should at least have a set of corporate objectives leading to clearly identifiable and

measurable marketing objectives.

Successful direct marketing communications have created strong brand image by effective

brand advertisements. Brand advertising can influence the value of the company Van Riel,

1995. The logical progression of this stance is that brand building will add to the value of the

company and therefore direct marketing can be used as a technique not only for brand

building but, in the longer term, increasing the value of the company.

Roland et al, in 2004 created a conceptual model which can be used to evaluate return on

marketing. “Marketing effectiveness helps to drive customer equity which enhances customer

perceptions” Simester et al. 2000. This results in increased customer attraction and retention

(Danaher and Rust 1996). Better attraction and retention lead to increased Customer Lifetime

Value (Berger and Nasr 1998) and Customer Equity (Blattberg and Deighton 1996). The

increase in customer equity, when considered in relation to the cost of marketing investment,

results in a return on marketing investment.

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The main aim of service organisations is to gain customers’ loyalty, customers on the

other hand customers want service loyalty which would assure them that they would never be

cheated and provide them with unique products even though they might be new or old

customers. Berry (1987) proposed the idea of earning loyalty by being loyal. Studies have

found that service loyalty leads to customer loyalty, and, it becomes essential for service

organisations to convince customers that they are committed to deliver excellent quality of

service whenever the customer wants. A successful organisation will always be able to offer

loyalty to its customers and fulfil needs that are not only present but also look in future and

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create products that they will need in future. So to maintain customer loyalty and customer

share it needs to maintain its relationship so that its competitors do not take advantage of its

leverage.

“The challenge for today’s organizations is not merely to reach the top, but to stay there”

Kandampully, 1996. “The customer’s perception of quality of service is based on the degree

of concordance between expectations and experience. Customers will remain loyal to a

service organization if the value of what they receive is determined to be relatively greater

than that expected from competitors” Zeithaml & Bitner, 1996. Customers prefer

personalized and enhanced relationships with their service providers Parasuraman et al.,

1991; and even they value benefits of maintaining the relationships Zeithaml et al., 1996.

This increases the importance of service organisation to conceptualise service concept

beyond short term goals to long term relationship. “Customers’ perception of exceptional

service is often associated with the personal interaction of the employees” (Kandampully,

1993). “Services management literature has repeatedly emphasized the importance of the

human element in the delivery of superior service” Crosby & Stephens, 1987; Gronroos,

1990b; Parasuraman et al., 1985; Solomon et al., 1985. “Service excellence is now an

integral part of any superior service (Berry & Parasuraman, 1992), it is not the value-adding

peripheral but actually constitutes the core of the service promise” Kandampully, 1996.

Hallowell in 1996 proved that customers’ satisfaction relates to and customers’ loyalty relates

to profitability.

Blattberg, R & Deighton, J., 1996 says that as communications between the organisations

and the customers have become more interactive, marketing managers have started talking

about share of customer requirements, customer outcomes and customer satisfaction

measurement. This lead them think that good marketing leads to good conversation, which

leads to attracting potential customers and retaining the present customers.

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Berger et al, 2007 came out with a model which helps us to understand how customer’s

choice on brands and their perceptions of quality which increases brand choice. So it has

become more important for organisations to increase their quality so as to retain customers.

Steering group of CIM talks how marketing activities can be made responsible for the

financial results. The model was given by Amber,T. 2000. This model says how we can

calculate marketing activities through customer behaviour.

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Max Blackston in 2000, found that there are two components that lead to successful

relationship with the customers, first the Trust in the Brand and second is Customer

Satisfaction with the Brand. This is the important information which states that it is just not

the marketing activities that lead to sales but there are other factors also.

Nasution et al stated that there is a link between marketing activities, sales performance,

brand equity, customer value and business performance. This helps us to analyse the

marketing activities which relates to customer value and brand equity leading to business

performance.

When we talk about marketing activities it becomes important to measure them a model has

given us a model by which we can calculate marketing productivity. This model incorporates

relative market share and relative price which is essential to sustain customer interaction.

This model gives us the base where in we can calculate marketing productivity.

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Hypothesis 1: Is there a link between market share and return on marketing investment

Hypothesis 2: Is there a link between brand equity and return on marketing investment.

One may argue that the model given by Roland et al, 2004 is an accurate model to calculate

return on marketing investment, but we may also say that the customer equity is not the only

criteria to evaluate it but there can me other criteria’s also. Increased market share and

increased brand equity are also the factors that may be essential to calculate investments.

By looking at these models and evaluating them one may form a method to calculate

return on marketing investment. One may also argue that the return on marketing investment

is a percentage rather than a number because when investments are allotted they are allotted

in the percentage of the revenue generated and not a fixed set of numbers.

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Methodology:

To calculate return on marketing investment (ROMI) will require basic customer purchase

information and involves a relatively simple methodology.

Data:-

The data needed to calculate ROMI are: A customer identification number (ID), the date of

purchase and the total amount of purchase. The customer ID can be obtained from the

organisation which keeps track of its customers purchase. This information is important

because it helps to understand which customer has purchased more frequently.

Segmenting:-

Segmentation of customers is important so as to understand which group of customers are

actually affected by the marketing communication that the firm has recently done. This helps

us to understand the how effective the communication has been. This also helps us to

evaluate our communication and understand which mode of communication is more effective

to which kind of customers.

By this information we can formulate a 2x2 matrix evaluating marketing communication

and customer purchase pattern. To evaluate customer loyalty and their preference one can use

questionnaire which would help to verify what the customer is buying and saying and this

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will also help us to understand what the customer likes about the shopping experience. This

helps us to understand the consumers better.

There was a research carried out on the customer loyalty by Singh et al, 2002, I would

like to use the type of questionnaire that he has used and also add some of my own so that I

could understand customers well.

Research Questions:

1. The Store Manager… (five point scale = “strongly disagree / strongly agree”)

a. Work quickly and efficiently

b. Can competently handle most customers request

c. Can be relied upon to know what they are doing

d. Act as if they know your customers

e. Can be relied upon to give honest advice even if they won’t make a sale

f. Treat you with respect

g. Don’t hesitate to take care of any problems you might have with perfume’s

purchased at store

h. Go out of their way to solve customer’s problems

i. Are willing to bend companies policies to help address customer’s needs

2. The store employees…. (five point scale = “strongly disagree / strongly agree”)

a. Is organised to easily pick your perfume selection

b. Is generally clean and free of clutter

c. Keeps checkout staffed so that you don’t have to wait

d. Has policies that indicate respect for the customer

e. Has policies that favour the customers best interest

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f. Acts as if the customer is always right

g. Has practices that makes returning items quick and easy

h. Goes out of the way to solve customer problems

i. Shows as much concern for customers returning items as for those shopping for

new ones

3. The Customer... (ten point scale)

a. How satisfying was your last shopping experience at this store?

Highly unsatisfactory / highly satisfactory

b. I feel that this store is…..

Of very low integrity / Of very high integrity

c. I feel that the employees of this store are……

Very incompetent / Very competent

d. Please value the store on the following factors….

For the price you pay for perfumes at this store, would you say shopping at

this store is a….

Very poor deal / Very good deal

For the time you spend in order to shop at this store, would you say

shopping at this store is

Highly unreasonable / Highly reasonable

For the effort involved in shopping at this store, would you say shopping at

this store is….

Not at all worthwhile / Very worthwhile

How would you overall rate your shopping experience at this store?

Extremely poor value / Extremely good value

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e. How likely are you to….

Do most of your future shopping at this store?

Recommend this store to friends, neighbours and relatives?

Use this store the very next time you need to shop for a perfume item?

Spend more than 50% of your clothing budget at this store?

f. Would you like to share any one instance where you found that the organisation

took one step ahead in helping you?

Based on these answers that the customers have given one can always formulate strategies

that would be more effective in targeting the customers in an better manner and increase the

investments that are been allotted to marketing. This will also help managers to critically

evaluate their customers.

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