Thread by @minethatdata

1 - All of you run a table like the table in this tweet, correct?

In other words, you know the total profitability of your ad spend based on the depth of ad spend, and you know how much of your annual sales/demand is organic and is not caused by ad spend, correct?

2 - In the example I shared, the company spends $24,000,000 on advertising, and generates $80,000,000 in sales as a result of advertising.

The company also generates $50,000,000 in sales organically, without the need to advertise.

3 - In total, the company generates $130,000,000 in sales and $13,600,000 in earnings before taxes. In other words, this is a healthy e-commerce business.

4 - Now, take a look at the table. Where is the point where profit is maximized?

5 - Profit is maximized if annual ad spend is reduced from $24,000,000 a year to $12,000,000 a year. If that were to happen, of course, total sales drop from $130,000,000 to $113,200,000. Total profit increases from $30.6 million to $32.8 million.

6 - So this raises a very interesting question ...

Would you want to lead a company that generates $130 million in sales and $30.6 million in profit?

Or would you want to lead a company that generates $113 million in sales and $32.8 million in profit?

7 - Without having the table available ... without knowing the relationship between ad spend and profit ... without knowing how much of your sales are organically generated, you can't even get to the point of having the discussion, can you?

8 - So please, please, run the table in the first tweet. Thoroughly understand the relationship between ad spend and sales, and fully understand how much of your business happens without the aid of advertising.

It's important stuff.

Questions?
KH