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Conversion Rate Optimization

ROMI: Clicks are Not Sales. Why Return on Marketing Investment is the Best KPI

What KPI should you use for Omnichannel Strategies?

The truth is, “traditional” KPIs like ROAS (or worse, CPC, CPA, Impressions, etc), fail to provide a true assessment of your omnichannel marketing.

Enter ROMI, or Return on Marketing Investment.

This post will break down why we (marketers) need to move toward true measures of ROI, and why I believe ROMI is the metric to focus on.

ROMI Definition: What does Return on Marketing Investment Mean?

ROMI stands for Return on Marketing Investment. ROMI measures the profit marketing generates relative to the resources invested.

Before we can understand why ROMI is a superior marketing KPI, we need to understand what it is, and how to calculate it.

How to (properly) Calculate ROMI

The formula for Return on Marketing Investment is:

ROMI = Profit Attributed to Marketing / Cost of Marketing

Note that ROMI focuses on profit, not revenue. For the most accurate measure, you should include all costs associated with the sale. These include:

  • Discounts & Returns -As we'll see, discounting carries significant costs to profitability and must be incorporated in any real evaluation of effectiveness.
  • COGS - What it costs to develop/create the product. 
  • Shipping & Fulfillment Costs - This includes any variable costs associated with getting the product to the customer such as shipping, packing, and staffing.
  • Customer Service/Sales - After sale service and success cuts into the gross profits generated from each sale. You may find customers from certain campaigns cost significantly more after sale resources than others.
  • Cost of Marketing Campaign - And finally, we get to direct costs of advertising. This includes distribution costs (such as ads), talent to create adverts, and technology required to do so.

“ROMI measures the true effectiveness of marketing investments.” - Barilliance Research

Why ROAS (and other Marketing KPIs) Fail.

I believe ROAS (Return On Ad Spend) is a flawed and often misleading KPI.

Simply put, Return On Ad Spend doesn’t incorporate all the factors that go into a true omnichannel marketing campaign.

Below I highlight the most significant reasons why I believe this.

ROAS Problem #1: ROAS Doesn’t Measure Profit

The number one issue with ROAS is that it measures revenue, not profit.  This creates misleading information.

Discount campaigns are a great example. While discount marketing campaigns can convert well, the profit generated isn't always praise worthy.

The math on discounts is brutal. 

We went over the relationship of conversion, discounts, and profits in full detail here.

However, to illustrate how misleading ROAS can be, I want to go over a quick example. 

Imagine a product with a 30% profit margin (costs $70 to produce, and is sold for $100). Creating a 20% discount actually decreases your profit by two-thirds (66.66%)! 

Discount: $100 * 20% = $20

Gross Revenue: $100 Sale - $20 Discount = $80 Revenue

Gross Profit: $80 Revenue - $70 COGS = $10 Profit

% Change: $10 Profit / $30 Original Profit = 33.33% of original profit (a 66.66% decrease).

Meanwhile, your ROAS numbers are through the roof because you are generating $80 revenue on $10 conversion costs.

If it costs $10 to generate a sale, your ROAS is 8x, yet you are generating $10 in gross profit.

After taking out the shipping costs, marketing costs (copywriters, designers, marketing tech), and customer support - it's likely the net profit on the sale is minimal or negative.

ROAS Problem #2: ROAS Only Takes into Account Ad Spend

Similarly, ROAS has no way of integrating expenses outside of direct ad costs.

This inflates the perceived profitability of every marketing campaign that uses ROAS as it's primary KPI. The reality is marketing campaigns cost much more than the distribution costs.

Costs include creative talent such as copywriting, videographers, and design - as well as regular technology expenses.

ROAS Problem #3: You Cannot Use ROAS On Anything That’s Not an Ad

Any advanced eCommerce marketing strategy extends beyond ads.

Below is a short list of eCommerce marketing campaigns that cannot be measured with ROAS. 

  • Onsite Personalization - Including cross-sales, upsells, and advanced product recommendations.
  • On-Site Messages- Including live chat, message bars, and welcome pop-up offers
  • Dynamic Content - Such as geographic discounts, shipping discounts, etc
  • Triggered Emails - From cart abandonment/browse campaigns to after-sale promotions 
  • Segmentation Technology - That is capable of creating detailed cohort analysis

All of these marketing campaigns are impossible to measure using ROAS. It is impossible to use ROAS becuase they don't have a traditional "ad spend" metric needed to calculate a ROAS KPI.

When you combine this with the fact that marketing campaigns that are able to use ROAS have inflated success metrics, it gives you an inaccurate view of which campaigns are succeeding and which are failing. 

Which brings us to...

ROAS Problem #4: Cannot Use ROAS On Omnichannel Campaigns

All this creates an inability to properly optimize your company's marketing mix. 

If you use ROAS as your primary KPI you are forced to view campaigns in siloed channels, segments, and devices.

ROAS doesn’t accurately measure sales lift based on improved personalization, nor your ability to retarget prospects on channels other than social and search (such as email, text, messenger, direct mail, etc).

Benefits of Using ROMI as Your Marketing KPI

After exploring the downsides of using other marketing KPIs, the benefits of using Return on Marketing Investment becomes apparent. 

  • Profit Focus Creates Accuracy - ROMI focuses on profits, not revenue. This gives you a clear picture on actual return and cash flow.
  • Completeness - Second, it incorporates all expenses giving insight on which marketing resources are under-utilized, and which are non-performing. 
  • Omnichannel KPI - Finally, ROMI is capable of comparing marketing objectives across channels and devices.

What is a good ROMI? Return on Marketing Investment Benchmarks

The truth is, there isn’t a true best benchmark to use. Every input, from average order values to profit margins, to cost of ads vary across industries.

That being said, we’ve collected some general ROMI benchmarks to evaluate your performance.

What Marketing Channels Generate the Most Revenue?

I want to quickly thank Wolfgang Digital for publishing their annual report on eCommerce KPIs

With their data I was able to create a few summary graphs to help establish some ROMI benchmarks. Above we see a breakdown on which channels are generating the most revenue. 

In 2019, Organic generated the most revenue (33%), followed by paid search (28%) and Direct (19%). 

Interestingly, Email and Social only accounted for 5% of revenues. 

How Organic Performs Across Industries

Breaking down Organic Revenue generated by wide industries begins to reveal how difficult it is to establish benchmarks. 

Travel eCommerce recognizes 41% of revenue to organic, while online only retailers see a 33% drop (33% revenue generated). 

Next Steps...

Return on Marketing Investment is a powerful KPI. It can be used to compare marketing campaigns across channels, and is increasingly needed in an omnichannel world. 

Once you commit to using ROMI, you need to establish personal benchmarks. 

We've published statics on email marketing (including ROI), Click and Collect strategies, cart abandonment, and personalized product recommendations

Lastly, if you are looking for a partner in personalization capable of improving your return on marketing investment across multiple channels, schedule a personal demo here. 

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