MEASURING MARKETING
EFFECTIVENESS
LECTURE 3: FINANCIAL METRICS:
PROFIT, MARGINS AND ROMI
CHAPTERS: 3 & 9
Dr. Rob Angell
MANG6533
Today
Fundamental Financial Metrics
1. Types of “cost”
2. Types of “profit”
Content
- Group Activity – Building an MPM System
the Peck’s way
Recorded Video - ROMI
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This Week
The Recorded Session (catch up - own time)
A close and critical look at return of Marketing
Investment
Content
1.
What is ROMI? [Topic 1]
2.
What is the main purpose of ROMI? [Topic 2]
3.
So, how do I measure ROMI? (NO CALCULATION) [Topic 3]
4.
A challenge of measuring ROMI (and why being a golfer will help you)
[Topic 4]
5.
ROMI and ROIMI Formulas plus examples [Topic 5]
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OPENING CASE
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Tango
Brand: Tango
Brand owner: Britvic Soft Drinks
Entrant company: VCCP, London
Idea creation: VCCP, London / Britvic, Hemel
Hempstead
Example
Tango, the soft drink brand, recovered its long
term decline by reconnecting with a new
generation of 16-24 year olds in the UK.
Tango was a declining business, and the rise of
Fanta coupled with Tango's falling marketing
budgets meant that it needed to make a big
impact quickly.
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Tango
Communications objectives
were:
Grow value share from 4% to
6%
Grow penetration from 12% to
14%
And do this profitably
...and all within 1 year of the
campaign launch.
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Tango needed to build relevance with a notoriously hard
to please audience. A historic jester brand, with humour
and boldness in its DNA, Tango sought to bring this
humour to the serious world of today's youth. We
needed to find out what really bothered today's young
people, so they ran three qualitative studies comprising
18 groups in total, split by age, gender and location.
“We made an unexpected discovery. It isn't the bigger
issues such as the environment, the housing market or
student debt that mattered on a personal level. It's
making a show of yourself. This is something that
happens alarmingly often when you're 16-24. They
crave acceptance, so being witnessed saying or doing
the wrong thing leads to toe-curling awkwardness,
because they haven't yet acquired the social skills to
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The Idea
A new campaign, 'Sticky
Situations' was developed,
filled with cringe-worthy
awkward scenarios.
It features Tango's first ever
female brand character, the
Tanguru, who embodies the
brand: British, edgy, and quick
witted. She brings urban street
savviness to help teens style
out awkward situations,
offering humorous in-themoment advice to help young
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Outcomes
Profit - total spend (media + production) =
£2,098,239 - £1,242,000 = £856,239 net
profit.
Profit ROI = profit/spend = £2,098,239 /
£1,242,000 = 1.69
Net profit ROMI = net profit/spend =
£856,239 / £1,242,000 = 0.69
Thus the campaign returned a profit ROI of
1.69:1, with a net profit ROMI of 0.69:1,
within 6 months.
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A LITTLE BACKGROUND
BACK TO THE CMO SURVEY
2022
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A Metrics Ranking
What do you think are the
THREE most CONSISTENTLY
employed metrics by Marketers
in 2022?
Costs, Net Profit, Margin
Difficulty Level
✪✪○
A: Bendle et al. (2017); p.65 -75, 91 – 101, 354-359
B: Bendle et al. (2015); p.67 – 77, 93 – 103, 366-371,
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Costs
“A monetary measure of resources sacrificed or forgone to
achieve an objective”
(Quinn, 2011; p.142)
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Fixed and Variable Costs
Total cost (£) = fixed cost (£) + total variable costs (£)
Fixed Cost = A cost that remains stable within a relevant range of business activity.
Variable Cost = A cost that increases in line with business activity
(Quinn, 2011; p.143)
Example:
A business pays £5k a year in rent and £100k in employee wages. They take on a new
client who wants 100 new units at a cost of £3 per unit. How much extra will the order
cost the business in total?
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Total cost (£) = fixed cost (£) + total variable cost (£)
Total Cost
Variable cost
Fixed Costs
Units
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Net Profit (and Revenue)
Net Profit =
Sales Revenue (£) – Total Costs (£)
(inc a reasonable share of corporate
overheads, e.g. headquarters rent, staff
wages @ head office).
EBIT[DA] (£) =
Net Profit (£) + Interest Payments (£) + Taxes + [Depreciation and Amortization charges]
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Margins
Unit Margin [on sales] (£) =
Selling price per unit (£) – Cost per unit (£)
iPhone 13 mini
iPhone 13
Selling Price = $699.00
Selling Price = $999.00
Cost to produce = $286.59
Cost to produce = $357.50
MARGIN = $412.41
MARGIN = $641.50
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Reuters.com
Margins II
Margin (%) =
Sales Price per Unit (£) – Cost per Unit (£)
Sale Price per Unit (£)
iPhone 13 mini
iPhone 13
Selling Price = $699.00
Selling Price = $999.00
Cost to produce = $286.59
Cost to produce = $357.50
MARGIN = 59%
MARGIN = 64.2%
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Variable cost
Total Cost
Fixed Costs
Units
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Cost per
unit
Quantity
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MOVING FORWARD
THIS WEEK…
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Recorded Materials
1. What is ROMI? [Topic 1]
2. What is the main purpose of ROMI? [Topic 2]
3. So, how do I measure ROMI? (NO CALCULATION) [Topic 3]
4. A challenge of measuring ROMI (and why being a golfer will help you) [Topic 4]
5. ROMI and ROIMI Formulas plus examples [Topic 5]
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Recorded Session Notes
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Return on Marketing Investment
(ROMI)
Difficulty Level
✪✪○
A: Bendle et al (2017); p.364 - 370
B: Bendle et al (2015); p.376 - 382
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What is ROMI?
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ROMI Goal
To evaluate the effect that spending on marketing contributes to
profit.
(Oxford Dictionary)
Essentially:
‘What is the ratio of spending to return?’
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What is the main purpose of
ROMI?
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Purpose
•CMO’s need to justify their value to CFO’s (arming)
•To kill off the HIPPO (disarming)
• That is: the highest paid person’s opinion.
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KOHL’s
- Suggestion to include large furniture in all
stores.
- The Board were very enthusiastic.
- CMO advocated soft-launch.
- Immediate launch in 70 (1 in 15) stores.
- Not only did the initiative not provide any
ROMI, but stores that had to reduce other
product lines saw pre-to-post reductions in
sales.
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So, how do I measure ROMI? (NO
CALCULATION)
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ROMI
There remains no universally accepted way of using or calculating ROMI…
e.g.
1. Comparing two projects of similar value and estimating the potential return
using projections / estimates (simulations)
2. Estimating the overall marketing budget in driving sales
3. Tracking the effect of specific marketing activities on sales in an
‘attributable’ manner
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ROMI (in theory)
Rust et al. 2004
• Marketing can have an influence
that extends over multiple
periods.
• Different types of marketing
activity have different wear-out
times
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Available?
Short-term Marketing Projects:
- ROMI (one-off – activities)
- ROIMI (one-of-several activities)
Longer-term (rollover) Marketing Projects:
- Customer Lifetime Value (CLV)*
* We don’t cover ROMI for long-term projects in this module
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A challenge of measuring ROMI
(and why being a golfer will help
you)
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A Challenge for Capturing ROMI
Pauwels and Reibstein (2010)*
Isolating marketing activities
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Golf & ROMI?
Golf – a short introduction
• Golf is a difficult and very skillful sport.
• On a golf course each hole is given a par score (a ‘fair’ score given the difficulty of the
hole ranging Par 3-5.
• A normal course of 18 holes has an overall par of approximately 72. A professional
golfer will be expected to get around the course in 72.
• Amateur golfers have a handicap which is the par (+) the normal extra number of
shots they need to finish the course (a handicap of 8 means that golfer normally
shoots about 80!)
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Golf & ROMI
I need to improve…
I can do any or all of the following...
• A new swing?
• A new putter?
• Some new shoes?
• A new bag? – I get tired lifting my bag!
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What do golfers and CMO’s have in
common?
How does this apply to ROMI?
• Marketing investments (like golf investments) can be tested in an experimental manner.
• To understand the incremental value of your initiative, you need to:
a. Keep Score – what is your baseline (normal sales/handicap)?
b. Control – if you implement something new, be sure that any change is genuinely due
to your intervention (is your change real?)
c. Increment Measurement – Has your score changed relative to the baseline? By how
much? Is this significant? Quantify the change.
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Treatwell
How would you spend a
£10m budget effectively?
• Learned the value of establishing incremental value when delivering
individual campaigns
• Foundations in marketing science
Case:
https://www.marketingweek.com/treatwell-most-effective-spen
d/
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Isolation…
Do you see an issue with the “idea” of isolation?
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Isolation…II
Do you see an issue with “the idea” of isolation?
1.
Realism in practice: External validity
2.
Marketing activity synergy: Interactions
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GoPro: Synergy
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ROMI and ROIMI Formulas plus
examples
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ROMI
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Contribution Margin
Measurement
Pre-campaign
100 Pens
Post-campaign
Extra Revenue
10 x Selling Price
– 10 x variable
costs
110 pens
Or RAM x Cont
Margin (%)
Extra (Variable Cost)
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ROIMI
The more observant would notice that (sometimes):
• Having figures for revenue without marketing might be complex.
• Looking at a more incremental approach may be better (i.e. Marketing Revenue before
V’s after a new action may be preferable)
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Example – Farm Equipment
A farm equipment company implemented a direct mail campaign to remind
customers to have their tractors serviced before spring.
The campaign cost $1,000 and increased revenues from $45,000 to $50,000.
Baseline revenues for tractor servicing (with no marketing) were at $25,000.
The direct mail campaign was in addition to regular advertising costing
$6,000. Contribution (%) on tractor servicing (for parts & labour) is 60%.
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A farm equipment company implemented a direct mail campaign to remind customers
to have their tractors serviced before spring.
The campaign cost $1,000 and increased revenues from $45,000 to $50,000. Baseline
revenues for tractor servicing (with no marketing) were at $25,000.
The direct mail campaign was in addition to regular advertising costing $6,000.
Contribution (%) on tractor servicing (for parts & labour) is 60%.
What is the ROIMI?
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A farm equipment company implemented a direct mail campaign to remind customers
to have their tractors serviced before spring.
The campaign cost $1,000 and increased revenues from $45,000 to $50,000. Baseline
revenues for tractor servicing (with no marketing) were at $25,000.
The direct mail campaign was in addition to regular advertising costing $6,000.
Contribution (%) on tractor servicing (for parts & labour) is 60%.
For every $1 spent on advertising
the company will see double the
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return.
Worth a look in your own time…
1. Return on Sales (RoS): Technically similar to Gross Margin
2. Return on Assets (RoA):
existing infrastructure
Standardizes performance by the scale of
ROA is a critical metric for some
firms and less so for others…
[think, why!?]
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Review
1. CFO’s like financial metrics so marketers have to be aware of
these.
2. Marketers tend to focus on top-line activities (revenues) but
should never overlook bottom-line savings (costs).
3. ROMI is very popular and intuitively simple, but more
complicated in practice.
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References
•
Ambler, T. (2003) ROI is Dead: Now Bury It. Admap: (September): 453.
•
Farris, Paul W., Bendle, N.T., Pfeifer, P.E. and Reibstein, D.J. (2011) Marketing Metrics: The Definitive Guide to
Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education.
•
Pauwels, K. and Reibstein, D. (2010) Challenges in Measuring Return on Marketing Investment, in Naresh K.
Malhotra (ed.) Review of Marketing Research (Review of Marketing Research, Volume 6) Emerald Group
Publishing Limited, pp.107 - 124
•
Rust, R. Ambler, T. Carpenter, G. Kumar, V. (2004) Measuring marketing productivity: Current knowledge and
future directions. Journal of Marketing, 68, 4. 76-79
•
Quinn, G. (2011) Brilliant Accounting.
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