Return On Marketing Investment: An attempt to calculate ROMI Overview
Performance measures have been used to assess the success of organisations. The modern accounting framework dates back to the middle ages and since that time assessment of performance has predominantly been based on financial criteria (Burns, 1998). Double entry accounting systems were developed to avoid disputes and settle transactions between traders (Johnson, 1983). By the start of the twentieth century the nature of organisations had evolved and ownership and management were increasingly separated. As a result, measures of return on investment were applied so that owners could monitor the performance that managers were achieving (Johnson, 1983). Since that time the vast majority of performance measures used have been financial measures of this type (Kennerley & Neely, 2003). An important task of marketing research is to assess the efficiency and effectiveness of marketing activities. Marketers increasingly are being held accountable for their investment and must be able to justify marketing expenditures to senior management. In a recent Accenture survey, 70 % of marketing executives stated that they did not have a handle on the return on their marketing investments. Another study revealed that 63 % of senior management said they were dissatisfied with their marketing performance measurement system and wanted marketing to supply prior and posterior estimates of the impact of marketing programs. With marketing costs already high and continuing to rise, senior executives are tired of seeing what they consider to be wasteful marketing failed new product and lavish ad campaigns, extensive sales calls, and expensive promotions that are unable to move the sales needle (Online – Citeman network). This created a need to calculate marketing investments. Return on Marketing Investment (ROMI) can be defined as the ratio measure of profit (return) to marketing investments (advertising and promotion expenses) used to produce that profit achieved by a firm through its basic operations. ROMI is an indicator of marketing management's general effectiveness and efficiency (Decision Analyst.com). Guy. R. Powell also defined it as the revenue generated by the marketing program divided by the cost of that program at a given risk level. Marketers employ a wide variety of measures to assess marketing effects. Marketing metrics is the set of measures that helps firms to quantify, compare, and interpret their marketing performance. Marketing metrics can be used by brand managers to design marketing programs and by senior management to decide on financial allocations. When marketers can estimate the dollar contribution of marketing activities, they are better able to justify the value of marketing investments to senior managements (Online – Citeman network). Many marketing metrics relate to customer-level concerns such as their attitudes and behaviour; others relate to brand-level concerns such as market share, relative price premium, or profitability. Companies can also monitor an extensive set of metrics internal to the company. One important set of measures relates to firms innovativeness. For example, 3M tracks the proportion of sales resulting from its recent innovations. Another key set relates to employees (Online – Citeman network). Amazon.com is a firm renowned for constantly monitoring its marketing activities. Their CEO wants to know average customer contacts per order, average time per contact, the breakdown of e-mail versus telephone contacts, and the total cost to the company of each. The man in charge of Amazons customer service and its warehouse and distribution operations looks at about 300 charts a week for his division (Online – Citeman network). Firms are also employing organizational processes and systems to make sure that the value of all of these different metrics is maximized by the firm. A summary...
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