ROI and ROMI are Different. Seriously!

I hear these words all the time: "What is the ROI for that campaign?" The discussion could be for AdWords, SEO, content marketing, display, social media or whatever marketing campaign we are discussing. But when this person uses the phrase ROI in the context of marketing, they almost always mean ROMI. Let me explain the difference.

ROMI is Return on Marketing Investment. Some marketers may use the acronym ROAS (Return on Advertising Spend). Essentially, both are the same thing. One is a metric for the return on marketing and the other focuses on just advertising. The formula for both is basically the same.

First, you subtract out the costs of marketing and then you divide by the costs of marketing. For example, if an AdWords campaign costs $12,000 and generates $300,000 in Revenue then the formula is [$300,000 - $12,000] / $12,000. The result can be expressed as a percent but often the number of digits is quite high and therefore difficult to comprehend (2400%). As a result, we often express the result (the quotient) in dollars. In this example we would express the result as a multiple: 24. We read this as such, "For every dollar spent we generated $24 in Revenue."

From a marketing point of view, this makes sense. As marketers, we invest in marketing (and advertising) in order to generate Revenue. In other words, we buy Impressions which ultimately lead to Sales and Revenue. Of course, there are many other variables like price, creativity, channels, distribution, and promotions but most marketers focus on driving up Revenue, not increasing Profit. Profit is a business concern with broader implications than strictly in the marketing domain. With this in mind, the formula for ROI is:

As we saw in the formula for ROMI, the R is for "Revenue". However, with the formula for ROI the R is for "Return", not Revenue. Return is really a calculation for Profit. This is a key difference between the two metrics. Note: COGS is the Cost of Goods Sold.

Typically, ROI is expressed as a percentage. Adding to the same example, Revenue is $300,000, COGS is $200,000, Overhead is $70,000 and Marketing Costs are $12,000. The formula becomes [$300,000 - $200,000 - $70,000 - $12,000] / [$200,000 - $70,000 - $12,000] * 100. The result is 15% which is a healthy level of profit.

So which metric should marketers be using? My answer is that all marketers should know the difference between the 2 metrics but most likely they should be using ROMI, expressed as a multiple.