Monday, February 15, 2010

Does Return on Marketing Investment give the true picture of marketing strategy?


Umamaheswaran BS, IIM S

Marketing has witnessed a paradigm shift in the recent years. It is no more an expense; rather it is more of an investment now. The increasingly globalised world compels companies to chalk out innovative strategies to gain that vital competitive advantage.
Marketing being the only revenue generating activity in any firm, there has to be a proper parameter to measure the performance of marketing strategies employed to know whether resources deployed are yielding proper results. Today, Marketing is one of the largest budgetary items in most companies and companies have stopped viewing it as a cost centre.

With accountability being the buzz word, it is high time the stakeholders get to know how exactly the organisations are allocating money and whether it is engaging in value adding activities. Consumer packaging industry has been using this with good returns. With a whole new gamut of media like internet, mobiles, etc, the interest taken by organisations in usage of metrics is increasing. With every company witnessing a lot of friction among the CXOs, developing and following proper metrics of the performance of the marketing initiatives will lead to amicable decision making and quickening of the implementation part.

There are 2 types of ROMI – Short term and long term with the latter also taking into consideration the brand awareness. Short term ROMI taking only the revenue helps in diverting resources from non performing activities to more profitable ones. For long term ROMI, Special techniques are being developed by brand valuation firms to monetise brand awareness with reasonable degree of accuracy. After AG Lafley took charge, P&G has taken it up with all the seriousness and has benefited from it immensely.
ROMI is definitely going to be considered by many companies in the future.


Arun Subramoniam, IIM B

At a first and superficial glance, it might seem that return on marketing investment is a fairly good indicator of the success of a marketing strategy. However, digging further might unearth a different story altogether.

To start with, returns need to be calculated using a tangible parameter available for immediate measurement in the relevant time frame. One such parameter is the sales figures. However, it may not truly reflect a host of other possibilities:
The sales, while a reflection of consumer behavior, do not capture the buyer’s likelihood of continuing the purchase behavior over time. It does not indicate whether loyalty has been built; the buying behavior might be habitual where the consumer will immediately switch given a marginally better offering.
The marketing strategy might be oriented to the long-term, where the sales figures would take time to pick up. The marketing investments may have been very high, as a result of which high sales need to be generated for good returns, which again could take time. Such cases might show a low RoMI in-spite of actually being able to achieve their desired goal in the short term.
ROMI is a lagged indicator, calculated based on results achieved in the past. This may not indicate what might happen in the future, or what could be done to sustain high returns.

While it is easy to criticize the drawbacks of a particular measurement index, suggesting a better alternative is a tougher task. Nevertheless, addressing the issue under consideration, keeping these points in mind, it would seem that RoMI might not give the true picture of marketing strategy.

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