Optimal Marketing Spending Using CP, CLV and ROMI Metrics

Customer profit (CP), customer lifetime value (CLV), and return on marketing investment (ROMI) are important marketing measures that can be cascaded together and used by marketers to optimize marketing spending, reduce spending waste, and improve marketing effectiveness.

CP focuses on identifying, sorting, and selecting those individual customers or a group of customers that generate profit for a firm in different ways. It is a backward-looking metric because it is based on historical information. The advantage of using the CP measure before CLV is that the unwanted customer database is filtered out so that only relevant customer profitability data is selected and becomes available (revenue and cost data) for CLV calculations. Thus, the CP data also provides driving parameters for CLV models. Using CP before CLV can help managers in shaping their decisions towards optimal marketing spending and can also reduce the computation time for CLV calculations.

CLV measures the present value of future customer profit streams across the entire customer life cycle. CLV is a forward-looking indicator because it is forecast-based. A positive CLV is considered attractive for selecting a customer for campaigning, and a percentage of this CLV amount can be allocated for campaign spending. By interpreting and analyzing the CLV data, the firm can also generate new ideas to gain new customers. Both metrics (CP & CLV) are important in increasing the value of customer relationships. The combined use of CP & CLV can help the firm capture the uncertainties associated with estimating and allocating campaign budgets. Additionally, this process can increase the accuracy in allocating funds for campaigns to increase profitability and can eventually help in reducing marketing spending waste.

The ROMI metric is used to measure post-campaign marketing effectiveness. It can also be used to justify marketing spending as well as in selecting the right campaign from many alternative campaign solutions in the planning phase. The allocated budgets based on CLV, as described above, can be used to calculate the projected ROMI or marketing ROI for each marketing campaign or program. After this, a baseline ROMI can be established before the campaign, and then the post-campaign ROMI or marketing ROI can be measured. The variances (in post-campaign) from baseline ROMI in terms of revenue and profit can be monitored, and through the process of feedback and control the CP, CLV, baseline ROMI, and related activities can be fine-tuned or changed as required to bring the marketing spending into control. The marketing spending is typically expensed in the current period; therefore, the ROMI described here focuses on measuring the short-term performance. Long-term ROMI can also be projected and measured by adding additional metrics such as payback period (PP), net present value (NPV), and internal rate of return (IRR) metrics to this system.¹

References and Suggested Further Reading

1. Farris, Paul W., Neil T. Bendle, Phillip E. Pfeifer and David J. Reibstein (2010),” Marketing Metrics: The Definitive Guide to Measuring Marketing Performance,” Second Edition, Upper Saddle River, NJ: Pearson Education, Inc., p. 354, pp. 153-179, and pp. 337-355.