Lab Store: Background & ROMI Formula

Many of you in the blog audience might not know I have been writing about both offline and online Marketing Productivity since late 2000 on my web site through articles, an e-mail newsletter with about 7,500 double opt-in subscribers, and a blog-like database marketing article review section.  Anyway, back in 2000 it was pretty hard to get people to listen to Marketing Productivity ideas because there was just too much money sloshing around.  Who cares about Productivity when you have unlimited budgets? 

So to prove out some of the concepts I was talking about, I started my own online store for under $1,000, all costs in.  Those of you who have seen me speak at Search Engine Strategies or the eMetrics Summit on customer retention know this web site as the “Lab Store”, which has turned into a large enough business on that same $1,000 infrastructure my wife now runs it as her full time job.  The Lab Store is a great resource for online marketing research and testing because I control everything (unlike most client situations) and perhaps more importantly, I don’t have to ask permission to release results.  So from time to time, I pull analysis out of the store operation I think will be interesting to other people and provide it for your review. 

That said, I’m not linking to the Lab Store site because I’m not fond of the idea that our competitors might use this blog to improve their business.  Lab Store Analysis Examples will link back to this post to provide context for new subscribers.

ROMI – Return on Marketing Investment

When we execute different tactics designed to increase customer value in the Lab Store, we measure the results using an incremental flow-through model I call ROMI (to differentiate from the extremely lightweight ROAS).  We define ROMI in online retail this way:

Sales – Cost of Product = Gross Margin
Gross Margin – Variable Overhead Cost = Gross Profit
(Gross Profit – Marketing Cost) / Marketing Cost = ROMI

where Variable Overhead Cost is basically the cost to process, pick, pack, ship, and service the incremental orders generated by the marketing, service, or operational initiatives.  ROMI answers the question, “For every $1 I spend on a marketing, service, or operational effort, how much cash flows through to cover fixed costs?  What do I get back, after all variable costs, including the cost of the effort?

Examples of how this works with efforts other than Advertising:

New Customer Kits
Managing Customer Experience

Overview of Lab Store stats and metrics can be found here.  Pics here.

 

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