Remembering Return onMarketing Investment

ROME

Ted Mitchell

• If I ask you for a definition of the• Return on Marketing Investment (ROME)• What do you remember as the equation?

Definitions of Rome are

• ROME = Z/E where Z = G-E

• ROME = (G-E)/E where G = R-COGS

• ROME = ((R-COGS) – E)/E where R = P(Q), COGS = V(Q)

• ROME = (P(Q) – V(Q) – E)/E where G = Mp(R)

• ROME = (Mp(R) – E) /E where Mp = (P-V)/P

• Where Z= profit after promotion expense, E = promotion expense, G = gross profit.R= sales revenue, COGS = cost of goods sold, P=selling price, Q= quantity sold, V=variable cost per unit, Mp = markup on price

How do we use ROME?

• 1) Predicting the profit, Z, after a planned promotion, E, knowing the normal ROME Z = ROME x E

2) Calculating total promotion budget, E, knowing the forecasted sales revenue, R*, the normal markup, Mp, the normal hurdle rate or IRR (i.e., ROME) required from marketing E = Mp(R*)/(1+ROME)

How do we interpret ROME?

• ROME is a measure of the average efficiency or effectiveness of the promotion effort at creating profit

• In Promotion Budgeting ROME is the Internal Rate of Return and it is a popular way to rank marketing programs

The Roots of ROME are

• 1) It is a cost-based budgeting method for Promotion Setting based on the basic profit equation Z = P(Q) – V(Q) – E E = P(Q) – V(Q) – Z

• 2) Breakeven Promotion Budget, E, is where Z = 0

E = P(Q) - V(Q)• 3) Setting the Promotion Budget, E, by defining the

profit it must bring in Z = ROME x E ROME(E) = P(Q) – V(Q) – E E = (P(Q) – V(Q))/(1+ROME)

The Virtues are

• 1) Simple to calculate• 2) Consistent with a goal of profits (not sales) • 3) Can be expanded to deal with IRR and

Customer retention rates

The Weaknesses of ROME are

• 1) assumes that forecasted revenue is independent of the promotion effort.

• 2) it implies if two promotion plans have the same forecasted net present value, then choose the one with the higher ROME or IRR, The policy leads to smaller market shares and fewer sales, and fewer customers

• Remember the Return on Marketing Expense, ROME