The basic formula for calculating return on marketing investment (ROMI) is:
[[sales-costs]/marketing costs]
Where:
- Sales is the revenue generated from marketing activity recorded as sales to customers
- Costs are the costs of generating those sales (cost of goods sold or COGS) and the costs of marketing.
Some notes:
How carefully you define sales and costs can be important in determining your true ROMI. Below I am going to show you how your reported ROMI can vary from between 5 and 1 – depending on which numbers you include in the calculation.
Let’s do this by looking at three ROMI scenarios:
- [Total sales / marketing campaign costs]: This is the simplest way to calculate ROMI. You add up all the sales made in a period, say Q1, and divide that sales revenue by your marketing spend in the corresponding Q1 period. So let’s say you generate £500k in revenue and you have campaign costs of £100k. Your ROMI in this scenario is £500k / £100k = 5 which can also be expressed as 500%.
- [Total sales-COGS / marketing campaign costs]: In this scenario we remove cost of goods sold (COGS) from the revenue. So let’s say you generate £500k sales but the cost of making the product sold was £250k. Now the ROI calculation becomes £250k / £100k = 2.5
- [Total sales-COGS / total marketing costs]: In this scenario we calculate revenue as sales-COGS (as in point 2 above), but we include total marketing costs – these can be the costs of all the assets generated plus any agency fees. So let’s say your sales revenue is £250k (£500k-£250k), but your total marketing costs for the period are:
- £100k campaign costs
- £25k origination costs (e.g. photography, licensing, DM postage etc)
- £25k agency fees
- £20k freelancers for internal fulfilment artwork
So your marketing costs in Scenario 2 have increased by £70k to £170k. This means your ROMI calculation now becomes £250k / £170k. In this scenario the ROI is 1.47.
The importance of marketing attribution
Of course during the period covered by this scenario there will be sales that would have happened anyway – even if there was no marketing activity. So now we have to consider the topic of attribution. How do we establish the proportion of the sales observed that were actually driven by marketing activity? You can read about the options for marketing attribution here.