What is Return of marketing invesment

22. 3. 2023

How do you know if you spend your marketing budget efficiently?

Finding the answer to the question “Are we spending our marketing budget efficiently?” should be on any marketing leader’s agenda. The goal of this post is to explain why it’s important to think about your marketing activities from a data-driven perspective.

Return on Marketing  Investment is the first topic in the series, and we will elaborate on what benefits a company gets from having this kind of insight. Still, we will also touch on the data challenges that prevent marketing people from easily getting this kind of report by themselves.

Marketing folks are creative, full of ideas, and great storytellers, but they should also be great with numbers. “What numbers?” you would ask. Their numbers around customer acquisition costs, return on advertising spent, average sales cycle, etc. The industry has evolved a lot, and when advertising a product or a service, it’s more important to know your numbers than find a good campaign idea.

Return on Ad Spent vs. Return on Marketing Investment

Unfortunately, most businesses think that the return on ad spend is the best way to measure how well their marketing works. But that is wrong because this report shows only a piece of the picture, skipping some essential things about marketing team salaries or the price of the software the marketing team uses.

Let’s start with the fundamentals and define return on advertising spend (ROAS) and how it is calculated. This metric (ROAS) looks at how well a company spends money on advertising and makes money from it. It is shown as a ratio between advertising costs and generated revenue. This metric is usually calculated for individual advertising channels: Google, Facebook, or LinkedIn Ads.

Return on marketing investment is a much more sophisticated report that provides a detailed picture of the effectiveness of your marketing activities. ROAS only looks at how much you spend on advertising for a single channel. Still, ROMI looks at all the costs of your marketing efforts, including your marketing team (salaries, software, etc. ), advertising agencies, sponsored campaigns, and any other money you spend to promote your products or services.

To make it easier to understand, let’s put the differences between them in a table:

Why should you consider ROMI?

Now that we’ve defined WHAT ROMI is, let’s spend some time discussing WHY this metric should be adopted by every business out there.

Improved Decision-Making 

First, ROMI can be used to determine which marketing projects give the best return on investment (ROI). This helps businesses make better decisions. If a business wants to find out which of its many advertising channels (such as TV, radio, and the internet) is most profitable, it may utilize ROMI to make that determination. The answer considers all the expenses associated with it, not just the advertising expense.

Improved Profitability

Since you know which marketing strategies give you the best return on investment (ROI), you can put more effort into those strategies while cutting back on or getting rid of the ones that don’t work.

Improved Forecasting

With a clear view of your full costs for each area of your marketing efforts and a good understanding of the generated impact, it’s just a walk in the park to understand how many dollars you are paying for each piece of the puzzle and what the return is. Once this is done, forecasting is easy, and you can make accurate plans for your budgets in advance.

Putting aside all the number-related benefits, ROMI should be a must, like going to the doctor to check your health. By interpreting the figures,  it is easy for stakeholders to understand where they should burn more calories in their marketing efforts so the company gets better outcomes.

What prevents companies from implementing ROMI?

For this report to be done right, you’ll need to overcome several challenges to ensure the result accurately reflects reality. Getting your marketing department to be data-driven requires you to have the right skillset among your team. 

Lack of experience and internal buy-in may hinder ROMI implementation. For ROMI implementation, it may be hard to find or expensive to hire people with data analytics, marketing measurement, and financial analysis skills. Companies may train their staff or outsource ROMI analysis to solve this problem. 

If you manage to put the proper skills in place, you will face another big obstacle that has different ways to give you headaches: data. Data is considered an asset for any data-driven company, but as one of my favorite quotes says, “Data is the new oil.”  “It’s valuable, but if unrefined, it cannot be used.” Let’s spend some time and deeply dive into what kinds of challenges you can expect from a data perspective.

Data Integration

Most marketing departments have the wrong idea that their marketing software gives them all the data they need to run advanced reporting, which is what ROMI requires. Most of these tools collect data about your marketing activities, such as the performance of your social media channels. But this is only a piece of the puzzle. Let’s take it to step by step, and you will understand why having marketing software is not enough.

To determine ROMI, you need to define two numbers: The first is “What is my marketing investment?” and the second is, “What is the result of the marketing investment?”

Calculating marketing investment requires your team to integrate data from different sources, like:

• Advertising Cost; This cost is relatively easy to discover as most of the tools out there keep track of how much money you spend on advertising, whether it’s Google, Facebook or any other social platform.
• Salaries Cost: You should calculate how many people and how many days they worked on a marketing initiative.
• Marketing Materials: Those beautiful coffee mugs you branded with your logo, and gave as gifts at the last event, should be considered expenses.
• Events: All the associated costs with an event should be included: participation fee, travel expenses, accommodation, and any kind of merchandise you prepared to promote yourself at the event.
• Website: If you require external help to create new content for your website, put a new story on your blog, or have someone create the reels needed to run on Instagram, those costs should be included.

If marketing-related costs can be found in different sources when it comes to income, most of the time, you will find everything you need in your CRM or your ERP (preferably in both).

But data integration is not about picking numbers from Excel and putting them together. To build a scalable system that can handle growing amounts of data, you need an ETL tool that can easily connect to internal and external data sources.

Sure, it might look like a walk in the park: take some numbers from here, take some numbers from there, put them all together, do some math, and that is it! Try to do that manually in an enterprise-level company that runs dozens of different campaigns simultaneously, involving thousands of people and spending massive amounts. And even in a small company, it would take someone a lot of time to do everything manually.

Data Quality & Analysis

Now, we have successfully integrated all our data sources. But our data comes from different systems, looks different, and is shown in different formats. Besides this, the data should also be complete, without empty fields that would provide incomplete information. So cleaning up the data and ensuring it is consistent and has the same format is an essential requirement in the process.

For you to automate this process and not have your team waste days manually validating and formatting data, it is recommended that you integrate all your data into a data warehouse. In a data warehouse, you will have the computational power needed to apply the necessary transformations, so your data will be ready to be used in reporting.

Data Visualisation

The stakeholders usually prefer a nice chart that explains easily and quickly what the reality is. During board meetings, it takes time and energy to go through several pages with different numbers and statistics, and no one likes this. ROMI is a dynamic indicator, so why not have it ready to be displayed each time it is needed, every morning if required, so the decision makers will have the complete picture each time they make a decision? The biggest problem with visualization is that it requires a skilled person to configure the report so it can be displayed properly in the BI tool.

ROMI is a complex indicator that comes in many flavors and shapes. You can do it incrementally, you can do it only for a specific campaign, and there are so many other things that can influence how the final report will look. But, what is too much, gets people fat or bored, so let’s consider sufficiently the information presented in this article

Conclusions

By putting together how much money was spent on marketing and how much money it brought in, you can easily figure out how well certain marketing activities worked.

Unfortunately, as you learned from this article, for your company to properly implement this report, you might need the following resources in case they are not already in-house:

• A data engineer that will handle all the data integration, creating steady data pipelines, that will feed data from different data sources.
• An ETL tool that will allow the data engineer to automate the entire workflow, and ensure the data pipelines are working 24/7.
• A data analyst that will work with the ingested data, as it requires clean-up, validation, formatting, and prepare it for reporting.
• A data warehouse that will act as a central repository but will also give the ability to automate the processes described above.
• A BI tool that will show, in a nice view, all the numbers you are interested in.

According to what is happening right now in the industry, we can expect the following yearly costs:

• A data engineer’s average salary in Europe is €70,000 to € 95,000.
• A data analyst’s average salary in Europe is €50,000 to €80,000.
• An ETL tool+ A datawarehouse+ Bi tool are combined  €50,000 to €150,000 for an SMB.

The yearly minimum cost is €170,000, which is a lot for most small and even some medium-sized businesses to spend, especially in these tough economic times.

What if you could implement ROMI at a fraction of the cost listed above?

Marketing BI is aware that putting a data stack in place and hiring a full data team are expenses that start-ups or businesses that need to optimize their spending cannot afford. As a consulting company, we offer our services so that our clients can get the results they need without worrying about the costs of technology, employing expensive and hard-to-find stuff,  or the many data challenges that lay along the journey.