MBA in 2 minutes | Lesson 17: Using decision calculus to allocate marketing budget

We will be solving practical challenges through MBA concepts. No theory only applications !

This lesson is for managers, future CEOs and entrepreneurs who struggle to allocate lets say 100 dollars between acquisition and retention strategy. Truth be told an an entrepreneur, I have struggled with this question myself. Well one can say, you may allocate 50 dollars to each acquisition and retention strategy. However, then we are missing out on the potential beautiful math which can provide tailor made responses for each sector, organizations and products.


Step 1: How to allocate marketing budget between user acquisition and user retention strategy?

As much as you may find this problem extremely uncommon, it is not. While working in strategy division for Groupon India, a dear friend of mine led Retention department. He was bi-annually allocated budget using which he would achieve user retention targets. However its a very important question for his boss to know how many dollars should my friend be given bi-annually?


Step 2: We do have a magical mathematical formula which can solve this problem


Customer equity (gained value from customer)= a*m-A+a*(m-R/r)*r/(1-r')

where:

m – profit margin/customer in one year

A – acquisition dollars/prospect

a - acquisition rate (depends on A)

R – retention dollars/customer

r – retention rate (depends on R)

d – discount rate of future cash flows

r’ - r/(1+d)


Step 3: Maximizing customer equity

We choose acquisition and retention dollars values to eventually maximize Customer Equity. This is also a classic calculus problem so we can take a first order and second order derivatives to solve the equation.


Second way is to build a sensitivity 2 by 2 excel where you have multiple values of acquisition dollars on X-axis and retention dollars on Y-axis keeping the total sum of the 2 constant. Once we do the analysis, we will find a sweet spot where your customer equity value would reach its maximum potential.


You may also be curious from where will you find the input data for other variables and that is where the beauty of tracking and monitoring numbers come in. In conclusion, you can do adhoc allocation but then we are not maximize the objective function and thus, MBA tools come handy to achieve efficient and best possible outcomes in corporate ecosystem !


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©2019 by Shatakshi Sharma | MBA in 2 minutes

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