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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