Know Your RoMA For More Success In E-Commerce and Online Advertising

Du Pont did invent the hierarchy scheme behind ROI -Return-on-Investment almost a century ago. And while the term has been adapted to many more principles than just running a complete organisation, some segments of corporate business struggle with it. Most surprisingly modern Marketing is one of them.

You still don’t know which part of your budget is blown in the wind

Henry Ford would not be much wiser about his ad spendings today as he was in the year he made that famous quote. People blocking corporate tracking of their activities is not new and the battle between consumers trying to shield themselves off and total transperency sought for by corporations probably won’t be won by any side ever.

However that does not spare management and marketers from taking the step they seem to avoid like the devil the holy water. Why?

If you believe in what Marketing can do for a company, then what you must fight for is utmost and seamless transparency of the customer journey through your (at least sales) processes!

To do so Marketing must approach its processes from a data-based point of view (data-driven is the popular term but I will always prefer to refer to data as the basis, for managers must be the drivers). Collecting process data relevant to capture both costs and earnings in my opinion will even supersede collecting personal data about customers for that either exists already or not. If you do not have it, live with that weakness until you covered the bigger challenge:

RoMA — Return on Marketing Activity

Can you tell the money your company made yesterday, or (earnings, not turnover)? If you can you are either a start-up with exceptional focus on your business processes or an established business ahead of competition.

But can you also tell the Contribution Margins achieved within sales induced by marketing activities? If yes, and if you can do so seamlessly then your start-up is ready for any kind of upscaling of its business or your established business far enough ahead of competition that you can focus on other stuff — including doing nothing :-)

Else the Data Economy will eat you up like the blind person walking into a cage full of hungry lions!

You need to be able to tell how much each marketing activity did contribute to the overall income and earnings, how well marketing helped to cover the costs of the business, how cost-effective and earning maximizing the marketing department acted!

To get an extreme idea of what I am talking about simply think of a keyword in Google AdWords and how you today can tell the number of clicks and leads and sales generated from it. Then take that further to being able to tell how much income got generated from that keyword based on spendings for all sales generated through it (Customer Acquisition).

Now make the last step and link this with your cost- and accounting system. Now you become able to tell how well sales generated through targeting and acquiring customers via spendings on that keyword did cover corporate costs of supplying the advertised product/service by calculating this over all levels of contribution margins to have full business transparency, not only data on earnings!

In trying to find out how well each sale covered your costs, you will find two different types of costs — as always: Investments and Recurring Costs. Those you will have to treat separately and allow for (even artificial) depreciation of investments by marketing to get the full picture, which you will need to be successful!

So RoMA consist of two categories

  • RoMI — Return on Marketing Investment
  • RoME — Return on Marketing Expenses

Return on Marketing Investment (RoMI)

This is kind of easy. Right? Wrong. For the definition of RoMI within RoMA differs from what you find in literature about ROMI. Witin RoMI any investment you make in relation to Marketing is a Marketing Investment.

Tangibles

The RoMA-Concept turns your spendings on a new Content Management System, on a new data center for Big Data analysis, adozen new call center workplaces or a Cloud API into Marketing Investment! While any Chief Information Officer will reluctantly watch his budget (and seemingly his importance) shrink, this fundamental change does finally away with the myth that IT does cost too much!

If you spend money on anything tangible that is used within processes linked to customers, prospects, intermediaries it is Marketing! If Marketing asks for something, Marketing has to shoulder it in internal calculations. If IT says that some Hardware needs upscaling for Marketing proceeds more data than planned, it is Marketing that has to do with less data or pay for more capacity!

It is Marketing (Sales or Customer Relations if you named your department that way) that needs to produce income on the platforms it asks for. Marketing should finally accept that responsibility (and IT should let go of it)!

Intangibles

RoMI includes much more though, because in many cases recurring expenditures do create long-term values beyond the incomes and earnings generated directly. Marketing has sadly become used to over-emphasizing the non-tangible aspects like brand-value, brand recognition, brand loyalty, or (worse) virality of content, audience engagement with content and frequency of brand interaction — just to name a few. Even cluster analysis can not tell you the financial value of a brand-loyal person since that loyality does not translate into the same purchasing volumes or frequencies for all people.

Measuring

While simple approximations based on averages do not get you very far when it comes to the value of customer brand-loyality, adding such costs — caused by marketing activities to achieve less tangible marketing goals — to the Marketing Investment calculation, will bring much greater transparency to marketing.

Putting Marketing Costs rather first than last in the contribution margin calculation when determining the RoMA directly reduces the contribution margin of a sale by the relative unit costs caused to enable it. This was not possible in the past due to technological restraints. But today it works live for any integrated online sales process and ex-post for every data-based sales process, even in an omni-channel environment.

So if a campaign is defined as building brand-awareness its costs have to be listed as Marketing Investment and deducted from each sale via depreciation.

Depreciation

The only question is the length of the depreciation period for such investments. The longer depreciation takes, the less Marketing Investments will diminish the overall contribution margins but this will not adequately reflect the Marketing Planning. Four basic solutions are possible:

  1. If there is a continuous Marketing Planning cycle on the tactical level in the company, then the depreciation period should last as long as the tactical planning period under which the Marketing Investments occur. Therefore a complete write-down has to happen when an activity ends because goals have changed within a period and the activity under question is deemed to not serve those new goals (i.e. when repositioning a brand)
  2. With standard depreciation of smaller investments, including those for many IT products being three years now, it is possible to write-down all Marketing Investments into intangibles within the same period those for tangibles get written down. It simplifies things but is periodically not necessarily correct.
  3. The write-down can be limited to the period(s) in which spendings occur. While periodically not fully incorrect it strictly ties spendings with sales and assumes that no sales will happen without spending on marketing and makes sales which happen after a campaign ended look more efficient than while it ran.
  4. The write-down can be alingned to a normal distribution curve. While this contradicts any accounting standards it philosophically fits well with the nature of awarenes of campaigns adding most of the depreciation by when sales should theoretically be highest — at the peak of the campaign. This however is by far the hardest to compute.

Note: All Marketing Investments can have spill-over effects into later periods. An “endless cookie” can tell you that a CPC five years ago has converted into a sale only now. But the brand awareness created by a Banner Ad twelve months ago which results in a current search in Google and direct purchase now is much harder to track.

Therefore, to keep the expenditures to calculate RoMI within reasonable ranges, the depreciation should be calculated according to any of the forestanding methods or a similar one in line with the corporate culture of the enterprise.

Return on Marketing Expenses (RoME)

If it is spent in the hope of creating a (direct) sale it is not an investment. As much as you may either spend on or invest in a client later on: Your Banner Ad, Twitter Card, Social Media discount promotion and the discount itself, they are all Marketing Expenses.

Yes, any discount you give on a product or service is a Marketing Expense that should be deducted beforehand and not fruther down the line when calculating the Contribution Margin of a sale. For in cases where it turns negative before all costs got covered, the discount has been too high to allow for any profits, a RoME or a RoMA. The assumption herein, that the sale would have happened without the Marketing Expense of the discount, is contestable. But in all cases where the sales volume is planned with one sales price based on costs and the margin desired and not with several prices for different subsets of the overall volume including discounts (like in the air travel industry) it is a reasonable one.

Not Ad Fraud-friendly

Real time bidding for ads may be a fraudulent business in many cases. But to a company monitoring its RoME any fraudulent activity becomes evident for there is live documentation of the uselessness of a campaign or at least some channles it uses. For each successful bid for an ad display resulting in no sale is reducing the RoME since the costs of many successful bids on fraud have to be covered by few or no sales the very same day.

With RoME being calculated and deducted before the Contribution Margin of the sale gets to cover all other expenses from manufacturing to general office costs, high Marketing Expenses will reduce the profitability of a sold good or service. This way Marketing Efficiency becomes the center of attention.

Data not gossip

If Marketing activities are targeted to specific clusters, then the overall profitability of targeting these can be made transparent as well as that of channels, media or any other distinctive part of a campaign for as long as it is properly provided for in the data sets and tracked.

“Highly profitable groups are those that generate high turnover which leads to higher earnings.” This theory may often not stand the test of RoME since high acquisition costs for high-spending target groups may indeed reduce the profitability of addressing them. Indeed the relative profitability of addressing lower spending groups, which may be less costly to acquire, could be much higher than going for seemingly attractive, “high spenders”. All kinds of marketing gossip just vanish, once a business does link its Marketing Expenditures directly to its sales and overall costs as a first step.

Using detailed process data will furthermore enable quick operational analysis and swift optimization of Marketing Expenditures. Such processes could even be handed to Machine Learning and AI systems. Indeed any business is well advised to seek to build its own learning curve in this area rather than relying on that of Marketing Agencies or providers of Advertising Software. These services at one point turn into black boxes, usually exactly when the corporate customer could profit the most from transparency and an enhanced flow of data.

Not on time

RoME does not do away with the dilemma of a CPC or a CPL on Day 1 only turning into a sale on Day 1+n and this not being tracked properly because the customer blocks this, because the company fails to do so or local laws not permitting some long-term tracking techniques. While it is theoretically possible to track all costs of targeting and re-targeting an individual until a sale is conducted (thus revealing the profitability of targeting this person) this turns out to be highly complicated and not necessary in terms of RoME.

For RoME does define all non-invstment expenditures as Marketing Expenses aiming at sales. Any continuous campaign activities (budget, targets, sales figures, timeframe) thus will over time even out all bumps caused by uneven behavior of customers to an extend sufficient to calculate the RoME and RoMA without loss of information on contribution margins and thus operational profitability.

In a way the concept of RoME within RoMA does free Marketing from the additional expenses and insecurities of one-to-one tracking of a single sales target (aka potential customer) by focusing on the overall balance between budgets and returns in order to optimize contribution margins.

RoMA is knocking at the door already

During this years dmexco (Germany’s leading E-Business and Online Marketing trade fair) I found that the concept of linking Online Marketing Expenditures with Contribution Margins is also being pursued by SAP. The German software giant has built a system to integrate Online Marketing Campaigns into its overall platform. The next step will be to link this up to inventory, controlling and accounting.

Of course their approach is not exactly what I promote (I believe that the Contribution Margins calculated for Marketing purposes must be different from those used in controlling). SAP is also seeking to calculate brand value and other intangibles with the help of formulas and models developed by academics. Herein I see two dangers:

  1. Firstly Marketing Departments may fall victim to improve their numbers through triggering the formulas rather than improving brand awareness or other intangibles with an indirect aim on sales.
  2. Secondly I believe that a corporation should have its own approach to evaluate and calculate intangibles, one that reflects its corporate culture and not the results of academic studies.

This leads me to the conclusion that my simple and straight forward approach to calculate both tangible and intangible Marketing Investments based on the same frame is more cost-effective as well easy to understand. Therefore it serves the purpose of guiding marketing decisions into the right direction much better than the more academic approach by SAP.

On the other side, the fact that RoMA creates a second type of Contribution Margin Calculation within a company should not cause conflicts in communication. It is easy to understand that Marketing needs its own view of markets. In market- or customer-driven organizations the Contribution Margin Calculation according to RoMA might even replace the hierarchy used in controlling, which is traditionally product driven.

Summarizing RoMA

To become more efficient and credible, Marketing must shoulder full accountability and provide total transparency of its activities and results.

The Return on Marketing Activities (RoMA) is a simple concept within which data from Marketing, Sales, Accounting and other corporate branches gets aggregated to see and understand the impact Marketing has on Contribution Margins of products and services provided.

The Return on Marketing Investments (RoMI) sums up not only investments into tangible goods which serve Marketing (i.e. Call Center infrastructure). It sums up all spendings by Marketing to achieve intangible goals as investments (i.e. Brand Recognition), too. This allows to distribute these two kinds of spendings on long-term goals over a time-frame using depreciation rates which then reduce the Contribution Margin of a sale.

The Return on Marketing Expenses (RoME) consist of all costs incurred with the direct aim of causing a sale. These expenses either fall into the category of spendings or that of non-realized income due to promotional efforts (i.e. discounts, rebates). They can be split over the time the expenses occur or the time the campaign is assumed to have a direct effect on driving sales. For longer running campaigns the tactical planning period for Marketing should be the time-frame within which the Expenses get distributed over sales.

The RoMA concept does free Marketing from the costs and efforts of breakting down all Marketing spending on one-on-one customer relations. Instead it uses principles of depreciation, cost-attribution and common assumptions in controlling and accounting to provide decision makers with commerical sales-data they can use to optimize their online campaigns and detect ad fraud more easily.

Contact me if you would like to inplement this concept into your organisation.
And please hit/click on the Green Heart to recoment this article to others. THANK YOU!

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