June 27, 2023

Our Natural Instincts

We tend to optimize in the short-term, and for good reason. We earn a bonus when we do that. We get to keep our job when we do that.

Now, let's go back to our paid social example. This time, we're going to cut spend by 10% for next year? What happens?

It's a good short-term decision. Demand decreases by $1.3 million, ad cost decreases by $709,000, profit increases by $277,000. Of course, you lose access to 6,406 buyers who then pay you $99,000 less profit in year two, $106,000 less profit in year three, $95,000 less profit in year four, and $88,000 less profit in year five. You lose out on $111,000 of future net profit ... you make $277,000 this year but lose $388,000 profit thereafter.

Bad decision to cut spend here.

In general, our Marketing Budget Experiments suggest we're sub-optimizing our future by optimizing the present. What we've been taught about modern marketing is generally wrong.

P.S.:  If the 29 year old Kevin had heard modern Kevin say this, 29 year old Kevin would have not wanted anything to do with modern Kevin. Well, times change, and we have to change as we learn how the world works. If we don't invest in marketing, we sub-optimize the future.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Best Practices? Probably Not. Sold Out? Yeah!

From time to time I share information with you from the fish monger in downtown Phoenix. And I know you'll tell me that they're a sm...