Question

You are a marketing director for a company that sells smart coffee makers that integrate into a person’s virtual assistant (e.g. Amazon Echo, Google Home, etc). Rather than distribute the coffee makers through stores, your firm opted for a direct marketing focus and uses direct marketing channels to connect with your customer. Last year, you sold 87,500 coffee makers at $120 per unit, with a unit margin of $40 per unit. The firm invested $2,200,000 in the marketing campaign that acquired those sales.

The firm based its campaign on lists of people who recently purchased a smart home device. It allocated its direct marketing budget across 3 channels, as follows:

Channel	Spending	# Sales
Paid Social	$1,000,000	40,000
Direct Mail	$850,000	31,500
Email	$350,000	16,000

1. What is the ROI of the overall campaign?
2. What is the cost of acquisition for each channel? Which channel performed the best?
3. What recommendations would you make for the 2020 budget?

Answer 1

Hi

The ROI will be calculated as the toal margin as a percentage of total investment made in spending.

A B C D E F G H I Channel Spending Paid Social $1,000,000.00 Direct Mail $850,000.00 Email $350,000.00 Total $2,200,000.00 #Sales Selling Price Margin 40,000.00 $120.00 $40.00 31,500.00 $120.00 $40.00 16,000.00 $120.00 $40.00 $87,500.00 Total Sales Total Margin Sales to Spending $4,800,000.00 $1,600,000.00 4.80 $3,780,000.00 $1,260,000.00 4.45 $1,920,000.00 $640,000.00 5.49 $10,500,000.00 $3,500,000.00 ROI 159%

E F G H FOTID 40 Channel Spending #Sales Paid Social 1000000 40000 Direct Mail 850000 31500 Email 350000 16000 Total =SUM(C3:C5) =SUM(D3:05) Selling Price Margin 120 120 40 120 40 Total Sales Total Margin Sales to Spending =D3*E3 =D3*F3 =G3/C3 =D4*E4 =D4*F4 =G4/04 =D5*E5 =D5*F5 =G5/C5 -SUM(G3:55) =SUM(H3:H5) ROI =H6/C6

b. To understand which channel performed best, it can be analysed in a number of different ways. I have used the conversion ratio of spending made by the total sales dervied. It can be observed that the Email made the best return on its investment since its Spending to Sales ratio is th highest.

c. For 2020 budget, the company must invest in the email in the highest proportion and paid social channel as the second best.