Question

The ACME software division managers are considering what their mix of marketing monies should be between “lead generation” activities and “research to refine customer segments”. The Marketing budget is $100,000 for the year. How should the budget of 100,000 be allocated between these two activities given the following guestimates of yields. The chart below shows the payoff (yield) to spending various fractions of the budget on each of the two activities. Note that spending on “lead generation” caps the total benefits at 46,000. Spending only on “research” caps the benefits of the entire budget at 117,000.

1. What is the best mix of marketing spending (they have to add to 100,000)? Think about each of the decisions to expand the budget for each activity by increment, one by one.

2. If you were the marketing manager, do you think you could make a case to expand your budget overall?

Total Yield to "Lead Generation" Total Yield to "Research" Allocation Of budget marginal benefit marginal benefit 25,000 25 45,000 20 57,000 12 68,000 78,000 87,000 95,000 102,000 7 107,000 5 11,000 4 114,000 116,000 117,000 117,000 117,000 10 5K 10 15 20 25 30 35 40 45 50 10,000 18,000 25,000 31,000 36,000 40,000 43,000 45,000 46,000 46,000 46,000 46,000 46,000 46,000 46,000 10 2 2 60 65 70 Higher percentages

Answer 1

1. We have to look at the marginal benefit from each 5k being sent on '''Yield Generation' and 'Research'.

Each incremental spending will have to go to the activity which has higher marginal benefit.

Suppose we have only 5k. The 5k will go for Research as the marginal benefit is 25k whereas marginal benefit of Lead generation is only 10k.

If we had 10k, then the second 5k will again go to Research as the marginal benefit is 20k compared to marginal benefit of 10k in Lead Generation.

By extending this argument, first 20k will go to Research. The next 5k may be spend on Research or Lead Generation as both will give a marginal be edit of 10k.

In this way, we keep allotting 5k each to both department seeing incremental benefits. At the end, we will be allocating 60k for Research and 50k for Lead Generation. The marginal benefit of last 5k in each department is 2k.

Thus, the best mix of marketing spend is 60k in Research and 40k in Lead Generation.

(This is because of the constraint that we have to spend 100k. If the constraint was not there, we would have been better off by spending less in each department as the marginal benefit accrued from last tranches of 5k is less than 5k)

2. A marketing manager would not be able to justify increasing the marketing spend. For each extra 5k we spend in any department, the marginal benefit accrued is less than 5k. Therefore, spending extra on marketing is not justified