Under the Hood Part 4: Optimized Budget
How do you optimize your marketing budget? Christopher Engman, CMO/CRO at Proof answers the following questions: What is the total spend you should use and what should be the spend on each activity to optimize either growth or profits or a mix of both?
To optimize your budget you need to understand when a certain marketing category is not giving more effect, it’s called the law of diminishing returns. If you have sales on the y-axis and spend on the x-axis with a certain slope function, However, the slope doesn’t continue forever. It’s not like if you put in an infinite amount of money on retargeting or in a certain TV campaign that you will just sell sell sell, no. At a certain point this starts to diminish at a inflection point and it’s important to be able to detect when that is happening. When optimizing your budget you need to understand more or less for each marketing type of activity where does it stop having an effect.
Two common constraints when optimizing your budget
Normally when you do an optimized budget you have two constraints. The first constraint is what is my maximum spend and it is just in the theoretical world that we have an infinite budget to play with. Typically the rest of the C-suite is giving you a certain amount of money that mostly can be allocated for marketing. In an optimized budget you can also run scenarios, what if we had 30-40 percent more budget to spend, how would that hit revenue and profit? But normally you get an amount allocated, this is the max spend you can do marketing and PR for.
The second constraint is a minimum multiplier. Depending on what you’re selling and the kind of gross margin you’re having on your products and services it allows you to have a certain multiplier as the least amount, the lowest allowed multiplier. One company that we’re working with they have five, so it needs to be five times the money for it to be viable. Can you guess what percentage they need on their gross margin for it to be allowed in their marketing mix? They have 30% but with five times the money you can even allow for a 20% gross margin and still at least the cash flow is positive.
In Proof we typically optimize our budget on a monthly basis with marketing mix modeling, per country product group etc. We produce the slope or the multiplier, the delayed effects and the standard error. Once or twice per year we are also doing the optimized budget for our clients where you take into account more things and we also look at where it stop to be profitable to put in more money in a certain type of marketing.