Optimal Online Marketing Budget
We've previously discussed the importance of the "square root" rule in analyzing marketing campaigns, when solid test-based data is not available to the analyst.
Assume you spent $20,000 on an online marketing campaign, yielding $60,000 net sales, and a net loss of $2,000 (assuming 30% of sales flow-through to profit). You want to know what might have happened, had you spent more or less than $20,000.
Square Root Rule --- Assume you wanted to only spend $10,000. Sales will change by the following factor: ($10,000 / $20,000) ^ 0.5 = 0.707. Net Sales of $60,000 will change by 0.707, or $60,000 * 0.707 = $42,426. Profit = $42,426 * 0.30 - $10,000 = $2,728.
Again, if you don't have good test-based data to make comparisons with, use this rule as a quick shortcut.
The table below illustrates different spend levels, associated sales, and profit.
Spending Level | Net Sales | Estimated Profit |
$10,000 | $42,426 | $2,728 |
$12,500 | $47,434 | $1,730 |
$15,000 | $51,962 | $588 |
$17,500 | $56,125 | ($663) |
$20,000 | $60,000 | ($2,000) |
$22,500 | $63,640 | ($3,408) |
$25,000 | $67,082 | ($4,875) |
$27,500 | $70,356 | ($6,393) |
$30,000 | $73,485 | ($7,955) |
Labels: Advertising, Budget, Multichannel Forensics, online marketing, Profit, Square Root Rule
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