ROMI: Why Isn’t Everyone Doing It?

ROMI: Why Isn’t Everyone Doing It?

The funny thing about obvious solutions is that they’re only obvious after they’ve been pointed out. We had a call last week with a company who was interested in learning about our capabilities. After some back and forth, one of their company’s business problems began to be put into words for the first time. They are beginning to ramp up the marketing for one of their brands but they’re unclear on how they’ll be able to track ROI, especially with some of the more tricky variables. After expressing some of their concerns and objectives they came with the simple question, “do you know how we can do this?”

After quickly wiping away the tears of joy in our eyes (because we can talk about this until the cows come home) we quickly responded, “Yes, let us show you how.”

After we spent 5 minutes explaining how the process works and what they can get out of it, they responded with a simple, but profound question…. “Why isn’t EVERYONE doing this?!”

Although the question was rather humorous at the time, and as a company we love to hear responses like this after sharing about what we do, they bring up a really good question. Why isn’t everyone doing a ROMI (Return on Marketing Investment) analysis?

Before we try to answer this question, let’s briefly explain what a ROMI analysis is.

ROMI (Return on Marketing Investment) analysis

Our basic approach to conducting a Return-on-Marketing-Investment (ROMI) analysis is pretty simple. We do “fancy math” to quantify the relationship between marketing inputs and the desired outputs. The inputs can be a long list of the various line items that marketing or sales dollars are invested in. Examples include advertising (by media – traditional AND digital), promotions, trade spiffs, rebates, inbound and outbound phone calls, etc. There can be multiple outputs as well. Examples include $-Sales, new customers, website traffic, hand-raising activity, etc. The goal is to understand how a change in an input can impact changes in the desired outputs – pretty simple concept.

But, of course, it’s not quite that simple in actual execution. Many marketing mix models use some form of linear regression to identify the relationship between spend (Inputs) and sales (outputs). But marketing (or for that matter, many business functions) do not operate in a linear world. The theoretical marketing response curve (“S-Curve”) is an example of a non-linear relationship. At low levels of spending, we expect to see very little increased sales response – the spending is below some effective level called “threshold.” As spending continues to increase, we expect to start to identify a positive relationship with sales … up to a point of diminishing returns, where an incremental dollar invested doesn’t produce the same response. So much of our analysis focuses on identifying what part of the response curve (“S-Curve”) the current spending level is operating in.

s-curve

Another complication: interactions. Rarely do we see one specific marketing line item “pop” by itself. Rather, we typically see that different combinations of activities work together to produce the maximum results. So, we have to examine each of the various combinations to determine how marketing activities work together. This becomes a “combinatorial problem” with literally thousands and thousands of possible combinations. Using robust software, we then configure the combinations and do some deep-dive data-mining.

While the analysis is always interesting (at least to a geek), we develop simulators so that our clients are able to better understand the relationships in the data and test their own hypotheses to determine the “best” course of action. Think of this like a bunch of faders on a sound board. Perhaps you’re curious how sales would be impacted if you crank up (increase spending) for fader 1 (digital advertising) and pull down (decrease spending) for fader 2 (trade-spiffs)?

music_faders

Ok, now that we understand what a ROMI analysis is, let’s jump back to our original question…“Why isn’t everyone doing this?”….

Fear of finding out the truth

Some people prefer to operate in the dark. This way if something goes wrong or if things fail, nobody knows who to blame. Or as a marketing professional, maybe you’re not completely sure your efforts are actually moving the needle the way your boss thinks you are. To reference a television show on ESPN… Numbers. Never. Lie.

Perhaps a more accurate saying would be, “Non-linear regression never lies”…. or at least its information is more accurate when it comes to measuring marketing activities. Companies often think that marketing functions in a straight line (linear regression). The reality is that it doesn’t. Marketing functions like the “S-Curve” mentioned above.

Once companies begin to understand the ROMI process, the first question is always, “Well, where are we on the S-Curve? Are we at the bottom (we need to spend more because we’re missing out on opportunity) or are we at the top of the S-Curve (each additional marketing dollar spent is starting to see diminishing returns).”

s-curve

These are the questions we begin to answer during the ROMI process. We often see one answer lead to another question. This is exactly how you want to approach measuring marketing ROI. Attack it one, precise question at a time. Each time you peel back a layer, it will lead you into more insightful questions about what’s impacting your business.

Measuring return on marketing investment is not about dumping all your data into a magic box and hoping it spits out a positive ROI number. It’s about answering very direct marketing questions. It’s about getting real with your marketing. The days of living in the dark are in the past…

Jumping back to the original question, “Why isn’t everyone doing this?”….

We’ve seen two kinds of responses to ROMI. Either people run for the hills because of fear about knowing the truth about their marketing OR we see companies or ad agencies get out in front and be proactive.

The companies and agencies that are getting out in front of this wave are reaping the benefits. The results have been so impactful that they’ve come to the realization that they can’t afford not to do this.

How do I get started with ROMI?

Chances are, even after reading this article; you’re still hesitant as you wait to hear the level of financial investment in a ROMI analysis. Well, the good news is, you can get your feet wet with ROMI for only $5k.

Rather than requiring a big financial investment up front, we’ll talk with you about some of your business questions and take a look at the data you have available. After assessing your data, we can tell you what specific business questions your data is fit to answer. Plus, once we have your data, the turn-around time is a week.

So to recap – it’s relatively inexpensive to get your feet wet with ROMI and it’s a quick-turn process. Are you starting to ask yourself the same question we heard last week?… “Why isn’t everyone doing this?”

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