November 11, 2015

What Was The Optimal Spend Level, Anyway?

Here's our base case.


When I increased marketing spend by 25% among my 0-12 month "A" customers, I generated less profit - in fact, the ratio between demand and profit wasn't good, was it?

I ran different scenarios. After 10 years, here's what profit looked like by scenario.
  • 0% Marketing Spend = $14.3 million profit.
  • 10% Marketing Spend = $15.6 million profit.
  • 20% Marketing Spend = $16.0 million profit.
  • 30% Marketing Spend = $16.2 million profit.
  • 40% Marketing Spend = $16.4 million profit.
  • 50% Marketing Spend = $16.4 million profit.
  • 60% Marketing Spend = $16.5 million profit.
  • 70% Marketing Spend = $16.5 million profit.
  • 80% Marketing Spend = $16.4 million profit.
  • 90% Marketing Spend = $16.4 million profit.
  • 100% Marketing Spend (current situation) = $16.3 million profit.
  • 125% Marketing Spend = $16.0 million profit.
  • 150% Marketing Spend = $15.6 million profit.
  • 175% Marketing Spend = $15.2 million profit.
  • 200% Marketing Spend (double) = $14.6 million profit.
Profit is maximized when marketing spend among 0-12 month "A" customers is at 70% of current levels ... in other words, if we cut back on marketing spend by 30%, we generate optimal levels of profit.

I know, I know, you want sales to grow. And when I doubled marketing spend, in ten years, demand is $121.8 million instead of $112.2 million. And worse, I know that many of you would happily give up $1.7 million in profit to grow demand by $8.4 million ... you'd be happy with that, so long as it doesn't come out of your pocket.

But if the profit comes out of your pocket, well, you'd want to know this fact, wouldn't you?

Tomorrow, I will let you download the spreadsheet, and I will give you a homework assignment for the weekend.