There Is a Sweet Spot for ROMI
What is the Sweet Spot?
Let me start with the answer. ROMI is the return on marketing investment. With the clients that we work with, ROMI is often $10-$20.
The way to read the number for ROMI is, “For every $1 spent on marketing, we generated $10 in revenue.” Note that a higher number is often better, but too high is not good, as we will explore later.
The Calculation for ROMI
Now that we have clarified the ideal, let me explain how we came to identify that range. First, you will need to know how to calculate ROMI. Here is a refresher on the components of the formula.
The sum of investments includes every cost associated with marketing within a given period of time, e.g., a month. Most obvious, are costs related to advertising such as ads on Google, Facebook, the radio, or signage. Less obvious are costs related to human resources such as salaries and fees related to people working on marketing activities. In addition, there are often subscription costs for software like CRM, website hosting and maintenance, marketing automation, etc. Companies handle these costs differently. Some companies include all of these as investments. Other companies just use the costs related to advertising. It’s up to you. However, if you include all costs, then this will change the target for ROMI because the investments will be higher.
The sum of Revenues includes all monies that a company generates. If possible, we like to focus on one outcome (i.e., one desired behaviour like purchasing a product in a store) and the funnel related to that outcome. Review the next section for clarification on the appropriate number of funnels to use.
There are a few ways to look at what should be included in the sum for Revenues. To use the “right” revenue number you will need to make a choice between:
Topline revenues coming from your income statement,
Gross Margin (also from your income statement) which is the sum after the Cost of Goods Sold are deducted,
New Revenues which exclude ongoing revenues such as subscriptions and retainers,
Or New Booked Revenues based on the value of the sales order that will be invoiced in the future. This number will likely come from those in sales who will be recording the entire sale in the CRM tool.
The number selected and used for revenues is different for each company. More often than not with our clients, we use New Booked Revenues (the total value of the sale). This measure can be the contracted amount, or it can be an estimate based on the average Customer Lifetime Value. This number for revenues gives a good approximation of the incremental revenue generated as a result of the recent investments made in marketing.
Generic Customer Acquisition Funnel
One Funnel or Two?
Before we continue, let’s review why some companies may have more than one funnel.
Most smaller businesses will have one funnel. For example, many companies just want to generate qualified sales prospects for a product or the line of products that they want to sell.
Other businesses, often mid-sized, will have retail products that they sell to consumers and commercial products that they sell to other businesses. This type of business will have 2 funnels.
The Products may be the same, but the pricing is likely different for consumers vs. other businesses who buy on volume. The Markets, comprised of potential buyers, maybe in the same geographical area, but the process for buying will be different. The strategies and channels used for Marketing to drive up awareness, engagement, and conversions will be different.
In addition, the Outcomes will likely be different for each funnel. In our lexicon, an outcome is the desired behaviour that the company wants people in the market to do. For retail buyers, the company will likely want cash on delivery (e.g., restaurants). Whereas when selling to other businesses, the company may send an invoice and accept payment in 30 days (e.g., wholesalers) because the product, markets, marketing, and outcomes are different, the funnels will be different. For the examples below, we will focus on just one funnel.
Managing the ROMI Number
What many business leaders (and many marketers) don’t fully understand is that there is a sweet spot for ROMI. In other words, there is a range for ROMI that is ideal, and this number can be managed. We call this the sweet spot.
The sweet spot for ROMI is the optimal amount between what a company spends on marketing and how much revenue is generated by that investment. As mentioned, at the beginning of this post, for many companies, the ideal range for ROMI is $10-$20. Let’s look at 3 possible scenarios: High, Growth, and Managed.
Cautious Strategy: ROMI is High
Let’s use these numbers:
- Investments in marketing are $1000.
- Revenues generated are $51,000.
- In this scenario, ROMI is $50.
When using this strategy, the company is not spending very much on marketing and yet revenues are being generated. This approach is cautious. It may appear to be ideal, but this can be misleading. It is very possible that there is a significant amount of lost opportunity. The question that lingers is, “If more is invested in marketing, would revenues increase?” My answer is, “Likely, but let’s do some marketing tests and find out.”
Growth Strategy: ROMI is Low
Let’s look at the other extreme:
- Investments in marketing are $10,000.
- Revenues generated are $30,000.
- In this scenario, ROMI is $2.
This is an aggressive growth strategy. ROMI is very low. Companies choosing to use this strategy are likely trying to grow aggressively. Their objective is to capture a larger share of the market. For most companies, this is not sustainable but in the short term, this may be a good strategy.
Managed Strategy: ROMI is in the Sweet Spot
Let’s look at the other extreme:
- Investments in marketing are $10,000.
- Revenues generated are $110,000.
- In this scenario, ROMI is $10.
This is the strategy that we recommend for most companies. With this strategy, the focus is on managing ROMI to be within a range that is close to the sweet spot. In this scenario, the amount invested in marketing is significantly higher than in the cautious strategy. This is offset by revenues that are significantly higher (double) - an objective for many companies. When using this strategy, the amount invested in marketing has been optimized and is working in the company’s favour.
Steps to Start Managing the ROMI for Your Company
Determine the strategy for ROMI that is best for your company.
Select the type of “revenues” that you want to track
Set targets for revenues and ROMI
Calculate the amount that you should be investing in marketing
Use this amount to develop the budget for marketing
Identify the channels that can be used to reach people in the Market
Articulate the specific actions that you need to take
Estimate the budget that you need for each channel and each action
Track the actuals for investments and revenues
Calculate ROMI at the end of each time period
Contact us if you need help.
Need Help?
Connect with me if you need help to calculate ROMI or improve the performance of your marketing investments and efforts.
Email me: Jeff Nelson
Visit our Contact-Us page.