May 17, 2023

The Tradeoff

Our intrepid Social Media Manager wanted to blow out the June budget. That didn't look like a good idea.

Cutting back on the budget? That only works for awhile, and then you harm long-term profit too much.

There are balancing points ... points where the tradeoffs between short-term profit and long-term profit are reasonably balanced. There is no right answer here ... just choices and consequences. But you at least want to understand the consequences of your choices, right?

In our example, the graph below depicts the relationship between short-term profit optimization (x-axis) and long-term profit optimization (y-axis) for June investments in Paid Social.

If you lose a ton of money this year, you never make up enough long-term to be in an acceptable situation.

If you make too much money this year, you never are in a situation where you make enough long-term profit to be in an acceptable situation.

The graph above shows us, based on this Marketing Budget Experiment, that there is a range of options that kind of optimize both short-term and long-term profit ... not an answer that anybody will be happy with, but that's how this stuff works.

In this case, you are better off to add about $150,000 in profit this year but then forego future profit so that in total you are about $50,000 better off over time (which means that you give up $100,000 in future profit).

In this case, the best of a bunch of sub-optimal choices happens by cutting the Paid Social budget by 40% in June ... with comparable answers happening by cutting the budget by 20% or 40% or 60%.

Somebody at this company is not going to like that decision. They won't like that you make less profit in the future.

Somebody at this company is not going to like today's outcome - they won't like the fact that this company is less profitable today because of the current strategy and wants today to look better.

That's why we run Marketing Budget Experiments ... we get to assess different outcomes and not have theoretical arguments based on one (1) implemented strategy.

In this situation, which investment decision would you make, and why would you make it?

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