Simple Guide to Return on Marketing Investment (ROMI)

Great introductory video on how to calculate the return on marketing investment (ROMI) metric.

Welcome to the video on a quick understanding of the return on marketing investment metric just as the outset what is romney for basically it’s a very short-term measure usually measures a particular campaign and what we’re looking for is what is the immediate payback of the campaign so in the middle there what we spent all the money of the brand that we put at

Risk versus what was our gain so it’s just measuring the effectiveness of the return obviously in marketing we tend to look long term so the romney’s weakness is it doesn’t consider long-term factors such as new customers and brand building and future purchasing tensions as listed at the bottom here so really it’s just a financial return metric ideal for short term

Campaigns so when we’re looking at the particular metric what we’re doing is okay normally we run the business without a particular campaign or anything special happening and we make so much money then we invest in something such as a online advertising and hopefully what we have is what’s called a promotional lift some extra sales and extra profits so we’re going

To work out g but for that extra profit compared to what we spent was that good did we do the right thing by the the brand in the company so to work this out we need three pieces of information the first one is the campaign cost the second one is what is the amount of money or profit we make without the campaign okay so that’s simply what we would expect to sell

Or what we would normally sell in that time period multiplied by our profit margin which is the difference between our price and our cost of the of product and that will provide us with our expected profit without a campaign and in technical terms that’s just called our baseline and it becomes a point of comparison for the extra profit and then we do the same

Thing we run the campaign and go ok what profit did we make with the campaign taking into account sales they knew the price and cost and i’ve got which may change so if we do a campaign that includes a discount usually we end up with a lower margin and our goal is hopefully to have a higher profit okay let’s work through two examples for the same thermal brand

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Normally they sell 10,000 units a price is 20 they cost his 5 that gives him a $15.00 margin so normally in this period they would make a hundred and fifty thousand dollars they go say to a particular month and they put twenty thousand dollars into online advertising and as a result they sell more which is fantastic so it’s a 20 percent increase so they’ve got

Up two thousand unit sales is just units okay so not profit at this stage so they’ve generated a twenty percent increase or promotional lift in their sales so we’ve got to work out did they make more money and how effective with this so what we do is we do a side-by-side comparison what would happen if we didn’t run the campaign this is just our normal everyday

Expected sales what we’re calling the baseline so what we would normally make is 15,000 in the campaign we made extra sales at the same margin so our revenue coming in what appears to be our top level profit is a hundred and eighty thousand which is obviously a lot more but we spent twenty thousand generating that so we to take the twenty thousand dollars off and

The profit contribution of the product for that period of time is one hundred and sixty thousand which is an extra ten thousand dollars so we normally make 150 we did the campaign and after playing for the campaign we’ve improved the brands position in terms of profit by ten thousand dollars so in terms of our return on marketing investment it’s this extra profit

So what was the end result of all that work how much better off are we versus how much money did we invest so we invested twenty and we added added ten okay so that gave us an extra thirty back okay so that’s the difference in the twenty of that goes back into the costs so we’re actually ten thousand dollars more in the the profit or in the bank because of this

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Campaign so that’s a pretty good return fifty percent now let’s look at the example for discounting so it’s the same brand same normal sales ten thousand and they’re making 150 but in stead of doing some sort of advertising they’ve cut their price by five dollars so their price and it was $15 their cost is five that hasn’t changed so their margin has gone from

Fifteen dollars down to ten dollars fortunately during the period they actually sold 16,000 due to the discount so we have a 60% increase in sales from 10,000 to 16,000 so we’ve now got to work out jig was that a good idea okay whatever had it now is a third column so i’ll get to that in a second so the same thing is before ten thousand times 15 we would be on

Track to sell 100 will make one hundred and fifty thousand dollars in profit what we did was sold 16,000 but our margin the we make first sale has been reduced okay so we’ve now making $160,000 so it appears down here with making $10,000 extra which is fantastic okay so what we need to look at if i just move that there is what do we risk so notice i’ve got the

Word risk in italics now we haven’t spent this but we risked it okay so this is once actually happen we sold that many $10 margin 160 thousand dollar profit has come in for the product which is an extra ten thousand dollars but what would happen if the price discount did not generate an extra extra sale this is what i’ve got here assuming we would normally sell

Ten thousand we would normally make that money okay so that’s virtually guaranteed or pretty well expected by the firm we go out and say okay what we’re going to do is only charge ten dollars i thought i only have a ten dollar margin so we are losing five dollars here we would have got that but we are giving away or gifting or rewarding our customers however we

Want to put it with a $5 discount so if this discount strategy didn’t work we would only have made $100,000 for the same period instead of a hundred and fifteen so we have put a risk and that’s a key word that risk $50,000 of the organization’s money so we use that as the base of the marketing investment technically we haven’t spent it but that is the downside

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Of the campaign so if nothing happens we will be fifty thousand dollars worth off the only way this discount work for us as profit is that we can increase sales volumes okay so we don’t actually take it out because it’s already come out of money as it’s coming in but then we say okay well that is our marketing risk or our marketing investment so in this case our

Return on investment is only twenty percent so it’s ten thousand dollars over the 50 we risk and that gives us our 20% so both campaigns to the same company both had quite positive return on marketing investment so both both for good and both generated an extra $10,000 profit for the organization so obviously that’s good as well but the difference is we risk more

In the discount one so in the ads campaign we spent 20 that goes out the door probably upfront generally and we got an extra 10 so we made a 50% return the discount one although we didn’t necessarily pay it out we ended up with reduced revenue streams coming in because the margin per sale had been reduced so we effectively put $50,000 on the line if it didn’t work

We were out of pocket 50,000 so we’ve still made 10,000 but there was a bigger downside if this didn’t work the ads won we were out of pocket 20,000 if the discounts didn’t work we were out of pocket 50,000 in terms of reduced profit so therefore why they both called and they both generate profit clearly the advertising campaign 50% versus 20% is more effective

In generating profitability so it probably would continue both what we will probably do the eight campaigns more often so hopefully that is helpful let’s just say a very simple introduction to the return on marketing investment metric

Transcribed from video
Simple Guide to Return on Marketing Investment (ROMI) By Marketing Study Guide