1 / 36

Part 2 of The Great New Debate!

Part 2 of The Great New Debate!. Ted Mitchell. Two Types of Budget Problems. 1 ) SBU Strategic Tasks of a ) Choosing the Budget for the Period b ) Making Incremental Changes 2 ) Allocating Budget between Projects at the Business Level and the Corporate level.

verdad
Download Presentation

Part 2 of The Great New Debate!

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Part 2 of The Great New Debate! Ted Mitchell

  2. Two Types of Budget Problems • 1) SBU Strategic Tasks of • a) Choosing the Budget for the Period • b) Making Incremental Changes • 2) Allocating Budget between Projects at the Business Level and the Corporate level

  3. Budget AllocationProblems Strategic and Tactical levels • Using ‘Return on Investment’ as the metric for giving more to one and less to anotherSBU A versus SBU BBrand A versus Brand BPush Plan A versus Pull Plan BDirect mail plan A versus Direct mail plan B • The Winner is the one with • 1) the Highest Profit (NPV)? • 2) the Highest Return on Investment?

  4. Which is Best of Four Projects Profit (NPV) Direct Mail C Direct Mail A High Direct Mail B Direct Mail D Low ROI Low High

  5. Which is Best A or B Profit (NPV) Direct Mail A High Direct Mail B Low ROI Low High

  6. Which is Best C or B Profit (NPV) Direct Mail C High Direct Mail B Low ROI Low High

  7. Which is Best A or D Profit (NPV) Direct Mail A High Direct Mail D Low ROI Low High

  8. Which is Best of A or C Profit (NPV) Direct Mail C Direct Mail A High Low ROI Low High

  9. Which is Best C or D Profit (NPV) Direct Mail C High Direct Mail D Low ROI Low High

  10. Strategic and Tactical Problems of Budget Allocation • Using ‘Return on Investment’ • First constraint is The budget limit or cut-off“We have a maximum budget of $490,000” • Second Constraintis The investment opportunities are lumpy and finite, exclusive“We have to choose between Plan C and D”

  11. There Are in Fact Three Choices • 1) Direct Mail #1 • 2) Direct mail #2 • 3) Direct Investment into Bank • ALL three have to have an ROI greater than minimum target ROI =20% • Budget = Forecasted G/(1+ Target ROI) or • Budget = Mp(Forecasted Sales)/(1+Target ROI)

  12. Which is Best Mail 1 or Mail 2 Profit (NPV) Direct Mail 2 High Bank Direct Mail 1 Low ROI Low High

  13. SBU Problem of Allocating Budget Between Programs or Plans

  14. SBU Problem of Allocating Budget Between Programs or Plans

  15. SBU Problem of Allocating Budget Between Programs or Plans

  16. Lenskold’s Solution • A 12% return on the incremental investment of $200,000 is below the cut-off of 20% • Therefore CHOOSE Direct Mail #1 with the lower profit! • Why? • Use the $200,000 in the bank and make an ROI of 20% which is $40,0000 • Add it to the less profitable Direct mail and your profit goes to $125,000 for Direct #1

  17. Which is Best Mail 1 or Mail 2 Profit (NPV) Portfolio: Direct Mail #1 Plus Bank Direct Mail 2 High Direct Mail 1 Bank Low ROI Low High

  18. Switch from #2 to #1 • BUT!!!!! • Doesn’t the DECREASEin Sales, Revenues, Market Share, Gross Profits count for anything

  19. Welcome to the Debate! • The Most Important Debate in The History of Marketing!

  20. There is another level of Analysis dealing with the difference between making a profit on investments or expenses and making a profit on transactions with customers • ROI = (Profit Returned per Customer Transaction) x (Customer Transaction Created per Marketing Investment)

  21. The Implied Assumption of a Fixed Total Promotion budget of $490,000 for making investments is crucial to the Lenskold Solution! • The portfolio of the Direct Mail #1 with a plus the standard investment of a 20% ROI provides a higher profit and higher ROI than Direct Mail #2

  22. Bank Direct Mail #2 Investment $ $490 Investment $ $490 Business-Investment Machine Business-Investment Machine Profit $98 Profit $110 Efficiency = ROI = $98 / $490 = 20% Efficiency = ROI = $110 / $490 = 22.45%

  23. Bank Direct Mail #2 Investment $ $490 Investment $ $490 Transactions Created From Investment Business-Investment Machine Efficiency = QOI = 8k/$490k = 16.33 Profit $98 Profit Created from Transactions Efficiency = ROS = Profit/Quantity Sold $110k/8k=$13.75 Efficiency = ROI = $98 / $490 = 20% Profit $110 Efficiency = ROI = $110 / $490 = 22.45%

  24. The Winner is Direct Mail #2 Bank Direct Mail #2 Investment $ $490 Investment $ $490 Transactions Created From Investment Business-Investment Machine Efficiency = QOI = 8k/$490k = 16.33 Profit $98 Profit Created from Transactions Efficiency = ROS = Profit/Quantity Sold $110k/8k =$13.75 Efficiency = ROI = $98 / $490 = 20% Profit $110 Efficiency = ROI = $110 / $490 = 22.45%

  25. Why is Direct Mail #2 the winner Over the Bank Machine? • It Makes More Profit! • AND • It Has a Higher Efficiency, ROI

  26. Direct Mail #2 Direct Mail #1 Investment $ $490 Investment $ $290 Transactions Created From Investment Transactions Created From Investment Efficiency = QOI = 8k/$490k = 16.33 Efficiency = QOI = 5k/$290k = 17.24 Profit Created from Transactions Profit Created from Transactions Efficiency = ROS = Profit/Quantity Sold $110k/8k =$13.75 Efficiency = ROS = Profit/Quantity Sold $85k/5k =$17 Profit $110 Profit $85 Efficiency = ROI = $110 / $490 = 22.45% Efficiency = ROI = $85 / $290 = 29.3%

  27. The Winner is Direct Mail #2 Direct Mail #1 Direct Mail #2 Investment $ $490 Investment $ $290 Transactions Created From Investment Transactions Created From Investment Efficiency = QOI = 5,000/$290 = 17.24 Efficiency = QOI = 8k/$490k = 16.33 Profit Created from Transactions Profit Created from Transactions Efficiency = ROS = Profit/Quantity Sold $110k/8k =$13.75 Efficiency = ROS = Profit/Quantity Sold $85k/5k =$17 Profit $85 Profit $110 Efficiency = ROI = $110 / $490 = 22.45% Efficiency = ROI = $85 / $290 = 29.3%

  28. Why Should Direct Mail #2 be the Winner? • Direct Mail #2 has higher profit!

  29. Why Should Direct Mail #1 be the Winner? • Direct Mail #2 has higher profit! • Lenskold wants Direct Mail #1 to be the Winner! It has a Higher ROI !!! • Plus we can use the surplus $200,000 as investment into the bank and make ROI of 20% and a profit of $40,000 • Total profit of $125,000 and a ROI of 24.5%

  30. Direct Mail #1 + Bank Direct Mail #2 Investment $ $490 Investment $ $490 $200 Transactions Created From Investment Transactions Created From Investment Efficiency = QOI = 5,000/$490 = 10.20 Efficiency = QOI = 8,000/$490 = 16.33 Profit Created from Transactions Profit Created from Transactions Efficiency = ROS = Profit/Quantity Sold $110/8k =$13.75 Efficiency = ROS = Profit/Quantity Sold $125/5k =$25 $40 Profit $110 Profit $125 Efficiency = ROI = $110 / $490 = 22.5% Efficiency = ROI = $125 / $490 = 24.5%

  31. Trade-Off • Switch from Mail #2 to (Mail #1 + Bank) • Gains in Profit per Sale • But • Loses in Sales and Share per marketing Investment • ∆ROI = I∆(Z/Q) + I∆(Q/I)

  32. Giving Up Direct Mail #2 Theindividual impacts are large!

  33. The Difference Between a Financial Investment and a Business Investment • In Business the real Assets are profitable customers that come back and products that don’t • The business goal is to Find and Retain Profitable Customers compared to Finding and Buying profitable pieces of paper

  34. Questions? • Do You want be a Finance Manager or a marketing Manager?

More Related