Review of Marketing Research, 6, Naresh Malhotra, 2009
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Abstract:
Return on Marketing Investment (ROMI) is defined as the incremental margin generated by a marketing program divided by the cost of that program at a given risk level (Powell 2002). The typical formula is displayed in equation 1:
Return on Marketing Investment = [Incremental Margin – Marketing Investment] / Marketing Investment
Use of this metric promotes accountability for marketing spending, enables comparison across alternatives to decide on the best action and furthers organizational learning and cross-functional team work. Unfortunately, managers are struggling to define and calculate ROMI (Woods 2004), especially outside the price/promotions domain (Bucklin and Gupta 1999). A survey of over 1000 C-level managers (CMO Council 2004) revealed that over 90% of marketing executives viewed marketing performance metrics as a significant priority, but that over 80% were unhappy with their current ability to measure performance. Only 17% of marketing executives have a comprehensive system to measure marketing performance. The companies they work for outperformed other firms in revenue growth, market share and profitability. Thus, most organizations experience considerable roadblocks to fulfill the appealing promise of measuring ROMI and using it to enable better marketing decisions and higher performance. Since financial decisions within the firm in non-marketing domain are evaluated, at least in part, if not primarily, based on their return on investment, it makes investing in marketing activities more difficult by not having their comparable measure.
Several reasons underlie these difficulties, from the improper use of the term ‘return on investment’ for measures that do not include profits/margins nor investment costs (Lenskold 2003), to the lack of research into how return on marketing investment can be measured and how it can be used to enhance performance (Pauwels et al. 2008). Indeed, while many marketing practitioners and academics have expressed concern about marketing accountability and return on investment, the current push largely has come from outside the field, notably top management and finance (Lehmann and Keller 2006). Unfortunately, CEOs and CFOs have been disappointed by the most common responses of the marketing field, from ‘it is hard to judge the impact of marketing spend since so many factors come into play between the spending and the ultimate financial result’ (marketing practice), to ‘we already show it through our sales response functions’ (marketing academia). The authors’ experience in recent years demonstrates that such positions are of little help in bridging the gap between marketing and finance fields, enabling joint understanding and trust in ROMI calculations and ROMI-based decisions and building the standing of marketing in the C-suite.
Previous authors have already laid the conceptual frameworks for return on marketing investment (Lehmann 2005, Lehmann and Reibstein 2006, Rust et al. 2004, Sheth and Sisodia 2002, Srivastava et al. 1998). True to the focus of Review of Marketing Research on “implementing new marketing research concepts and procedures”, the current paper discusses 10 conceptual and implementation issues that complicate measurement and use of return on marketing investment. First, the ‘incremental margin’ in equation 1 (hereafter ‘return’) needs to be forecasted, in terms of magnitude but also timing and associated risk. Second, the investment could involve a combination of marketing actions and needs to be considered from the point of decision perspective. Once the components of returns and investment are measured, it is still unclear whether they should be combined for a focus on (7) impact versus efficiency and (8) realized versus potential return on marketing investment. Finally, acting upon measured return on marketing investment requires (9) clarity on how to weigh multiple objectives and (10) an understanding of whether high ROMI means the marketing action should get more or less investment in the future Often, spending more on programs with a high ROI will lower the ROI percentage but raise the total return, given we are generally at the diminishing returns stage of the response curve.
The remainder of this paper discusses all 10 challenges in detail, giving examples and critically examining how research has addressed and should further address these issues.
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