Chapter 2:
Show Me The ROMI ( Return On Marketing Investment)
Chapter 2: Show Me The ROMI ( Return On Marketing Investment)"
What is a successful marketing program? Most business people would probably tell you it’s one that generates new customers or increased sales. But how do you know if your marketing program is doing its job? Figuring that out is tougher. According to Gerald Garcia Jr., President and CEO of AIMS Worldwide, Inc., a vertically integrated marketing solutions services company:
The key measurements of your marketing program must include tangible benefits such as revenue or profit or customer activity. It’s not enough to justify it with cost efficiencies in media buying or subjective ‘measurement’ of creative programs.
The first step in developing your Street Fighter Marketing program is to determine what your desired end result is in any or all given marketing components, as well as for your overall marketing program. To do that, all of your marketing initiatives must have some tracking capabilities. You will also need to be able to calculate how much you’re willing to invest to generate a new customer or expand your sales from an existing customer. Doing so helps you calculate your return on marketing dollars or budget invested.
Accountability
Your marketing results must be measurable to be practical. Without measurability, there’s no accountability. Without accountability, you can’t calculate your ROMI. And without calculating your ROMI, you can’t determine if you’re getting your money’s worth. Therefore you need to have the means to determine if all of your various forms of marketing are getting the desired results. If you can’t incorporate a tracking procedure that allows you to measure the results of your marketing, you’re at risk of wasting money, time, and opportunity.
Before you commit to do another marketing program, ask what your accountant would say. My baby brother, Howard Slutsky, is a Certified Public Accountant. He’s a numbers guy -- conservative, boring. He is a bean counter and proud of it. He’s not creative or intuitive. If I can’t prove it to him on paper that a given marketing approach makes sense, he shakes his head with disapproval. So, before we spend money on marketing, I ask, “What would Howard say?” Now the same pragmatic approach to marketing is working its way up the corporate ladder.
Those heady days of blind budget increases are fast being replaced with a new mantra: measurement and accountability. Armed with reams of data, increasingly sophisticated tools, and growing evidence that the old tricks simply don't work, there's hardly a marketing executive today who isn't demanding a more scientific approach to help defend marketing strategies in front of the chief financial officer. Marketers want to know the actual return on investment of each dollar. They want to know it often, not just annually. And increasingly they want a view of likely returns on future campaigns. The push is coming from the top ranks. CEOs, CFOs, and even board directors, have relentlessly cut costs in every corner of their companies except marketing and are fed up with funneling cash into TV commercials and glossy ads that they say cost more and seem to do less. That's especially true at a time when profits are under attack and consumers of all ages are zapping ads and spending more time playing video games and surfing the Internet. The bean counters know that marketing matters. But they're hazy about how much or what kind.
Macro ROMI
No, it’s not an imitation Italian dish made with pasta and cheese. It’s a bird’s eye view of your marketing’s effectiveness and a good place to start learning how to generate a good return on your marketing investment.
Add up all the expenditures directly related to your marketing. Include all traditional advertising, plus community involvement programs like church bulletins, high school newspapers, Little League sponsorships, and Main Street Festivals. If you’ve purchased any specialty items with your logo on them like pens, t-shirts, coffee cups, key chains, refrigerator magnets, and so on, put them in the pot. If you have provided in-kind support, include your cost of donating the product or service. Don’t forget your Yellow Pages ads, message on hold, internal telemarketers, salespeople, giveaways like tickets to concerts or lunches with prospects. Oh! And don’t forget your basic marketing billboard promotional piece…your business cards.
Add any design work like logo development and website design. Also assign an appropriate amount for items you use for multiple purposes including marketing (e.g., stationary) and add that amount to your marketing costs. Once you add it all up the price of all the items, you will have an accurate idea of your marketing costs. Compare it against your total gross and net sales.
Now, what would happen if could get the same level of sales and cut your marketing budget in half? Street Fighter Marketing Solutions will do just that for you. But you will have to make some tough choices and difficult changes.
Calculating Your ROMI. In his book Return On Marketing Investment, Guy R. Powell defines ROMI as, “revenue (or margin) generated by a marketing program divided by the cost of the program at a given risk level.” This definition works fine for big companies with major budgets. However, since the focus of my book is marketing at the Street Fighter level, the ROMI definition we use is simply “Revenue generated by a marketing program divided by the cost of that program.” The Street Fighter definition allows you to express your ROMI as a specific dollar amount or as a percentage.
Powell also factors in another element that he calls the “hurdle rate,” which he defines as the minimum acceptable, expected return of a marketing program at a given level of risk. You don’t need to take into account the hurdle rate when following the Street Fighter Marketing Solution. For most marketing programs executed on the local level, you simply need to know how much revenue you generated in relation to what it cost you to generate it.
The Street Fighter way uses the same method you would to evaluate a return on any investment, on marketing or a new delivery van or a third store. The investment costs you X. That investment generates Y, which is sales, profit, new customers, or whatever other criteria you use to measure company performance. You subtract X from Y, and the product is your ROMI. You can express it in real dollars or as a percentage, depending on your objectives.
Consider this example. A radio schedule costs you $5000. You are promoting a specific product at a specific price that is not being advertised or marketed anywhere else. Consequently, customers who request that deal are most likely to be responding to the radio advertising. There is $10,000 worth of sales for that product. Assume that half of the customers who came to buy that product also bought additional items worth another $3000 in sales. Your immediate return on gross sales is $13,000 less $5000 or $8000 (simple enough to figure out for the radio investment).
But you should also factor in the direct cost of the goods sold. If your margin were an average of 50%, the gross profit generated from this particular radio schedule would be $6500. The return, therefore, would be $6500 less $5000, or $1500. You could say either that the advertising was profitable or that there was a 30% return.
There are other considerations when calculating ROMI. For example, of those customers who bought as a result of that radio schedule, how many of them are first time buyers with your business? If a total of 100 customers spent $13,000 and 25 of them are new customers, you have to look at a few other numbers to determine the ROMI:
1. Of the 75 regular customers, how many of them would have purchased that item had you promoted it with less expensive marketing like counter displays, targeted postcard mailers to customers or statement stuffers?
2. Did you offer a discount or value added? If so, determine how many of the regular customers would have paid full price if there hadn’t been a promotion.
3. Track how many of the 25 new customers return again and become your regular customers. If you were able to determine that of the 25 new customers, 15 of them become regulars, your ROMI for that particular radio schedule would be much higher. To figure exactly how much higher, though you would have to know what a new customer is worth to your business.
What’s A New Customer Worth To You?
It’s strange, but many small business people have no idea what a good regular customer is worth to their businesses. By calculating that, you should gain a better idea of what you’re willing to invest or risk to attract a good regular customer. It also tells you how important it is to keep your existing customers happy. The cost of retaining a customer and even expanding a customer’s value is much less costly then getting a new customer.
To determine what you’re willing to invest in marketing, first discover what an average new customer is worth to you. To determine their value, answer the following questions:
1. What is your average sale? (Transaction amount)
2. What is the frequency of your average customer? This calculation can be expressed in transactions or visits per week, month, or year depending on the type of operation you run.
3. What percentage of new customers become average regular customers? This will undoubtedly vary depending on how that new customer was generated. For example, someone buying for the first time using an aggressively priced coupon would less likely be a repeat customer than one who bought based on a personal recommendation of a friend. To be more accurate, you may want to calculate this information based on several different criteria. Then once you have the numbers for three or four scenarios, take an average.
4. What is the average life cycle of a new customer? That is, once you get a customer, how long will that customer continue to buy from you before he or she moves, gets mad, or no longer has a need for your product or service? This length of time can generally be expressed in months or years. It may be a more difficult number to get, but do your best.
5. How many new customers are referred to you by your existing customers? When you gather information about a new customer, ask how they found out about you. One possible answer is “referred by a friend.”
When calculating your return, consider that there are three main types of ROMI:
1. Immediate ROMI
2. Long-term ROMI
3. Multi-input ROMI
Immediate ROMI is the return you get on a given marketing event. That would be the dollars generated directly from the sales related to that promotion. In the example above, the Immediate ROMI was $1500 or 30 percent. It’s always good when your marketing shows an immediate profit. It doesn’t always work that way. $5000 could have been spent that generated $3000 of total sales. That’s $1500 of actual margin and a loss of $4500.
Long-Term ROMI takes into account all of the sales generated from a new customer over that customer’s life cycle. In the example above, you generated 15 new customers. For those 15 new customers, look at the following numbers:
1. Your average sale is $100.
2. Your average customer frequency is once a week.
3. Your average customer life cycle is two years.
4. You get one new referral for every two new customers.
Assuming these are accurate numbers, those 15 new customers represent about $1500 in new sales per week. They buy an average of 50 times during the year, or provide you with $75,000 in sales. They stay with you for two years, so double the amount of sales to $150,000. You work on a 50 percent margin, so your gross profit is $75,000. You can also make a case for an additional $37,500 that will be generated from the referrals you get from those 15 new customers.
Even if the immediate ROMI is a loss, you may be able to see that in the long term that your marketing will eventually show you a return. But you can’t sustain those kinds of losses for too long.
Your ROMI numbers are only as good as the raw data you consider. Don’t guess. You must have a tangible way of proving the numbers you use. Without tracking and data capture, it’s all just guesswork, and that’s worthless. Wrong numbers are worse then no numbers at all because they will mislead you. We call this “Phony ROMI.”
Armed with this type of information and a strong tracking system, you can begin to figure out what your ROMI will be on any single promotion or on a promotional campaign. As mentioned before, just about any form of marketing or advertising can be effective or ineffective depending on a number of elements. One of those elements is the cost of the promotion. If Steve ran a local radio campaign that cost him $2500 and it generated 15 new customers, his immediate return would be $1500 or a $1000 loss. But if he determines that half of the new customers became regulars, he could justify that advertising expense, because over time, it will have paid for itself.
On the other hand, if the campaign focused on a price and item that brought in only the bargain hunters, it’s likely the radio ads lost money.
There are several different ways of gathering the information you need to calculate your ROMI.
Multi-input ROMI. If your ad appears in a monthly magazine each month for a year, do your sales from each ad increase each month? If so, you may have to factor in the benefit of the repetition of that ad. Perhaps the first few insertions lost money, but by the third month, it had started generating net profits. The third ad shows a positive ROMI. In such a case, you may want to calculate your ROMI based on the entire schedule of ads in that publication. It’s likely that the results you’re getting in months three through twelve would not have been as strong without the first two ads that lost money.
Making these calculations is more complicated when you mix the media. It is possible for a customer to see your front sign, read a newspaper ad, observe several of your delivery trucks with your logo, talk to a friend who recommends you, and then look you up in the Yellow Pages. When that customer is asked, “How did you find out about us,” he might respond with the last marketing contact, “Yellow Pages.” But that sale would not have happened if it weren’t for most, if not all, of all those previous impressions.
The point is that capturing this information is not perfect. Just be aware of the limitations as you begin to put the information to use.
Tracking Devices
Redemption. Redemption of a printed piece that has value when used in a purchase is an easy and accurate way of evaluating printing forms of marketing, including print media, direct mail, group coupon mailers, etc.
Consider Steve, the manager of a Back Yard Burger in Tennessee. He arranged for a Blockbuster down the street to hand out a coupon to each of their customers for one week. To get the special price, a customer had to come in with the cross promotion certificate. The number of certificates redeemed only tells you half the story. There were about 200 redemptions. But not all that came in were new customers.
Steve simply had his counter people ask everyone who redeemed the Blockbuster certificate, if it was their first visit. If they were, the counter person marked it on the certificate. They also attached that certificate to the receipt of the sale. In that way Steve could determine exactly, to the penny, the level of new immediate sales that were generated from that promotion. His bounce back coupon also allowed him to determine who came in for a second time.
To analyze the true value of a promotion, distill the number of new customers from the redemptions. If you have a regular customer already, you don’t want to discount that regular customer if he or she would have been willing to pay full price to begin with. This point is particularly more important for marketing on a local level. Another consideration is whether the frequency of visits of a regular customer was increased by that customer’s use of the certificate.
You’ve probably figured that his ROMI was very high, since the cost of the entire promotion was about $25. These types of lower cost alternatives to more expensive media advertising will be explored in later chapters.
When you get down to it, there are really on four ways to increase your sales on a local level:
1. Increase your customer count. (Get more customers)
2. Increase your customer frequency. (Get them to buy more often)
3. Increase your average transaction value. (Get them to spend more money each time).
4. Convert current purchases into more products or services with higher profit margins.
If your marketing tactic positively impacts one or all of these four areas, you can show a strong return, which we refer to as “Worthy ROMI.”
Any degree of Worthy ROMI will usually involve tracking your marketing tactic in one of four ways:
1. The number of visit your location.
2. The number of inbound phone calls.
3. The number of mail in, fax, or email requests or orders.
4. The number of unique visitors that log on to your website.
All four of these require a “call to action” in the marketing proposition. In turn, each action allows you to gather the information you need to begin to determine the quantitative value of your marketing. With e-commerce, for example, you can easily track where all your sales came from, as well as the activity the customer does on your site. It also allows for data capture, which is very important for follow-up marketing of all types to be addressed in greater detail later.
Direct mail and direct response advertising, where the product is purchased directly as a result of the advertisement, is also easily tracked. The challenge comes from most other forms of marketing that are not as easily tracked. Below are some common approaches that can help you begin to get an idea of what level of sales is generated from which marketing approaches.
Redemption. A coupon is the one of the easiest ways of tracking. It has to accompany the purchase. It generally saves money or increases value, giving the customer a reason to bring it in. Determining if the coupon user is a new customer or not requires more effort, though. You must train your frontline staff to ask the question, “Is this your first time in our store?” The answer then needs to be recorded on the coupon or on a tally sheet. Whether a customer is new or existing is an important piece of information for getting a real accurate ROMI. Discounting your regular customers, who probably would have paid full price anyway, is not the best way to increase your sales. It’s okay to do that when necessary, however. If a given coupon promotion has 100 redemptions and generates 10 new customers, it’s probably going to have a positive ROMI.
Advertising Codes and Extension Numbers. For print advertising including newspaper, magazine, and direct mail, you can use a promotional code, unique phone number, or email address to determine which ad was responsible for customer contact. In your call to action, include the special code. If the reader is taking advantage of a special offer in your ad, they must give you the promotional code to receive the offer. The code tells you which ad generated the sale.
For a coupon or ad that is either mailed in or brought to your location, the code is still important. You can run the same ad in several publications over a period of time. By making the promotional code unique to each insertion, you can track which publication or edition brought in the business.
Once you know the medium responsible for the contact, you can track the purchases of that contact to figure out the ROMI for that ad. Getting several hundred phone calls is not enough. How many of those phone calls resulted in sales? Only when you know that can you figure out if the ads are really working for you.
Specific To Product. When introducing a new product or service, gross sales of that product or service can easily be compared to the cost of generating those sales. Steve at Backyard Burger started a kids’ night on Wednesdays. Kids eat free when accompanied by a paying adult. He brought in a clown, toy giveaways, and a Moonwalk inflatable each Wednesday, spending an additional $150 for the extras. (He was able to get a trial rate for the inflatable Moonwalk for four weeks of $50 per week including set up). The marketing was done internally to existing customers and on an outside manqué sign. Assuming he’s running a 50 percent profit on food, paper, and labor costs, he needs to generate at least $300 more on a Wednesday to break even. With an increase of, let’s say, $600, there would be a ROMI of 25 percent on gross sales ($150 cost into $600 in additional sales). That’s pretty strong. So, in this case, the increase in sales came mainly from existing customers buying more often.
It’s possible with this type of tracking method that you’ll get more response than you will actually record. A customer might have intended to bring his children one night, but couldn’t for some reason. Yet because he had top-of-mind awareness as result of the promotion, he may come in the next day for lunch. In that case, the kids’ program would have generated an additional sale at lunchtime, but it would not likely be included in any tracking program except the macro-ROMI calculations.
Specific Call To Action. In your advertising, ask the consumers to take a specific course of action. It could be to call a certain number or visit a website. You could get a rough idea by comparing the overall volume of calls or hits to prior to the marketing program with those after the marketing program. Or you could provide the consumers with a specific number to call or URL to visit, which would give you a more accurate take on the activity generated from the marketing.
Unique Toll-Free Numbers. Toll free numbers are very inexpensive. They are simply forwarded into your regular phone lines. Most vendors only charge you for the actual calling time used on the inbound call. The advantage is that if you assign a certain toll-free number to a specific marketing campaign, any calls on that number are automatically tracked for you. You monthly bill will even give a list of phone numbers that were used in calling your toll-free number. This set-up is not only good for tracking, but also for creating a very inexpensive follow-up marketing program, including enhancing your database marketing program. There will be more on this later.
Consumer Research. Consumer research can determine if there is an increase in overall awareness of a product, service, or business. The problem is that is very costly and generally can’t be applied to specific advertising. So for most small businesses, it is impractical to use. However, for the savvy Street Fighter, sometimes you can get a local college that offers a marketing research course to take you on as a class project. Just make sure that the questionnaire they use will not bias the answers you get.
Managing The Tracking Initiative
In your business, you need to have your frontline people ask the questions and document the results. It has to be clear that this is not a volunteer assignment. Make it easy for them with a simple tracking sheet that requires very few entries. I prefer to use one that uses simple tick marks so it takes a minimal amount of time for the counter people or inbound phone staff to capture that information.
You also will need to spot-check their efforts. Just because you tell them they must record this information doesn’t mean it will get done. I suggest a carrot and stick method. Send a “mystery shopper” into your place. If the counter person does the marketing data capture properly, the mystery shopper hands over a $20 bill on the spot. The word will get out real quick. Conversely, if the counter person does not capture the data properly, the shopper hands over a memo in the shape of a $20 bill that tells that person he or she just lost out a nice spiff. Likewise, the word will get out real quick.
For the phone staff, it should work similarly. The manager could have an envelope with a $20 bill in it. Only the mystery phone shopper and the manager would know the secret password. When the phone staff captures the right information, the caller identifies himself/herself and tells the phone staff the password so he/she can tell the supervisor. The envelope is handed over on the spot. But if the phone staff does not handle the call properly, the phone staff is given a different password. The supervisor hands over a different envelope over with a note explaining that it could have been a $20 bill.
The Untrackable
What if you have a marketing program that has no effective way of being tracked? According to B. Joseph Vincent, Vice Chairman of the Board for AIMS Worldwide, “At AIMS we have a doctrine that states, ‘If we cannot measure it, we will not recommend it. Period.’”
First, you need to asses the level of risk in involved. For a local business, if such a program costs $10,000, that would be high risk. If it costs $50, it’s low risk. Obviously, you have to adjust the number for your marketplace and business. For the higher risk marketing ventures that are not traceable, the answer is simple. Stop it. If you can’t track it, don’t do it. On the other hand, if it costs you very little of money and time and you have a good feeling about it . . . also stop it. With limited budgets you can’t afford to guess what works and what doesn’t. Only choose those marketing approaches that have the ability to prove their value to you. If it’s not provable, it’s not valuable.
There may be marketing that is not provable that works great. The problem is you’ll never know it. For local businesses, you have to be picky about where you put your limited resources for marketing.
Once you’ve figured out all these number related to your marketing, you will have a valuable piece of information at your disposal. It’s like knowing the actual cost of the car to the dealer before negotiating the final price. The calculations tell you several things. First, it lets you know if you’re making improvements in the efficiency of your marketing. Secondly, it gives you a guide when evaluating the cost of a new marketing program. If that radio salesperson comes to you with a $5000 proposal, you may now know that it only makes sense to you if that investment can generate, lets say, $15,000 worth of sales. You know from past experience that it has generated about $10,000 in sales. Given that, you should only be willing to pay $3,330 for that schedule to make it work for you. If the rep doesn’t play ball, you simply walk away and find an alternative marketing approach that fits within your guidelines. Either way, you are working to improve your ROMI. Improved ROMI results in improved Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA).