Using Return on Marketing Investment Effectively

Marketing executives make many strategic decisions across various spending categories, products, and markets. For example, they may choose to invest in online advertising for product A, launch a price promotion for product B, and engage in a sponsorship for their full brand.

Executives therefore need a metric that assesses and compares the productivity and accountability of their many marketing engagements. Return on marketing investment (ROMI) is the logical metric of choice.

Ideally, ROMI metrics would be single numbers that executives could easily compare across marketing activities. For example, a manager might want to state with confidence, “My search advertising campaign yielded a return of 60%, well above average for ad campaigns for our brand and exceeding last year’s return of 45%.” Importantly, the return calculations would be made on net marketing contribution, found by multiplying revenue increase due to marketing by gross margin, subtracting marketing investment, and dividing the result by marketing investment.

Unfortunately, the reality of marketing does not lend itself well to simple ROMI performance metrics, and executives must understand the metric’s determinants before deploying it across tactics strategically.

ROMI’s Determinants

Consumer response to marketing activities is not linear. Research shows it is typically concave, with diminishing returns to scale, or S-shaped, increasing and then showing the diminishing returns (Hanssens, Parsons, and Schultz 2001). As a result, the profit response to marketing spending is typically inverted-U-shaped (Mantrala et al. 2007). And ROMI depends critically on marketing spending.

In the hypothetical search advertising example, ROMI might be 150% for the first $10,000 spent, 40% for the next $10,000, and negative at higher spending levels. Firms therefore cannot compare ROMI across different marketing campaigns or media, unless they spend the same amount on each.

Academic and practicing marketing analysts have long recognized this challenge. Instead of reporting ROMI in papers, academics focus on top-line productivity metrics, such as sales lift due to marketing, net profit, contribution to overhead, or marginal ROMI (i.e., return on last dollar spent).

To use ROMI correctly, marketers must understand consumer response patterns and the accounting consequences of spending. Researchers have carefully examined marketing spending’s impact on short-term and long-term profitability, customer lifetime value, and other strategically important metrics. But as much as practitioners favor ROMI as a simple yardstick, they must focus on ROMI’s determinants—top-line performance enhancement, profit margins, and marketing costs—then derive the metric on a case-by-case basis. In so doing, they cannot expect a simple return metric that can easily be compared to others (Farris et al. 2015).

ROMI for Marketing Tactics

Most marketing effectiveness studies examine individual actions, particularly advertising. Some focus on marketing’s direct impact on sales to derive the profit and ROMI implications.

With improved intermediate consumer attitudinal data, especially digital metrics like clicks and likes, analysts can derive ROMI in two steps: (1) Estimate marketing’s lift on an intermediate metric (e.g., clicks a digital ad generates) and (2) determine how the intermediate metric translates into future sales (i.e., the conversion rate) (Hanssens et al. 2014; Dinner, Van Heerde, and Neslin 2014). Marketers can make the necessary inferences using historical data and econometric methods, experiments, or a combination of the two (Krishnamurthi, Narayan, and Raj 1986).

In the digital world, marketers have extended their ROMI models to account for the full consumer journey, which allows advertising to reach the right people at the right time (Danaher and Van Heerde 2018). The analysts make a distinction between first-purchasers (customer acquisition) and repeat-purchasers (customer retention, upselling, and cross-selling), as their ad responsiveness has been shown to differ (Deighton, Henderson, and Neslin 1994). Combining the two effects enables analysts to estimate marketing’s impact on customer lifetime value (Gupta, Lehmann, and Stuart 2004).

ROMI for Marketing Strategy

In the context of marketing strategy, which typically combines multiple instruments, ROMI must focus on long-term performance impact, specifically sustained performance growth (Dekimpe and Hanssens 1999). Ataman, Van Heerde, and Mela (2010) have shown that long-term sales growth is more sensitive to investments in product and distribution than advertising and sales promotions. Indeed, firms cannot expect advertising or sales promotion ROMI results to have a sustained impact.

Marketers can use ROMI to examine how marketing investments enhance critical assets known to improve long-term business performance. Edeling and Fischer (2016) have demonstrated that marketing assets are more important in driving firm value than individual marketing actions. They find the meta-analytic firm value elasticity of brand strength is .3 and that of customer relationship strength is .7, while for advertising spending, the elasticity is only .04. Edeling and Himme (2018) use the meta-analytic results to recommend the following strategic marketing allocations: Invest 61% of budget on customer-related assets, 28% on brand-related assets, and 11% on market share.

Research has shown that customer-based assets correlate strongly to customer satisfaction, and customer satisfaction movements can relate to stock price changes (Fornell, Morgeson, and Hult 2016). Published reviews have also been shown to influence customer satisfaction with new products, and Floyd et al. (2014) have found that review quality elasticity is about .7, while that of advertising is .11, according to Sethuraman, Tellis, and Briesch (2011).

Summary

Marketing executives and academic analysts have taken significant interest in ROMI. While executives would like to have one number to gauge their marketing investment’s performance, oversimplification can lead to significant future spending errors.

For individual tactics, such as advertising and sales promotions, firms must derive ROMI by measuring marketing’s lift on top-line performance and conducting a marketing cost analysis. Marginal ROMI, found by determining return on last dollar spent, might serve as a unifying metric, being positive for underspending, negative for overspending, and zero for right-spending. But for more strategic marketing decisions, firms should use long-term growth measurement and/or changes in brand or customer relationship assets driving long-term performance to derive ROMI.

Citation

Hanssens, Dominique M. (2024), “Using Return on Marketing Investment Effectively,” Impact at JMR, available at https://www.ama.org/wp-content/uploads/2024/07/Using-Return-on-Marketing-Investment-Effectively.pdf.

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