Kevin Hillstrom: MineThatData

Exploring How Customers Interact With Advertising, Products, Brands, and Channels, using Multichannel Forensics.

January 21, 2007

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)

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