## 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)