Budgeting, Pricing, and ROI
This domain tests budget-setting methods, unit economics, and the difference between revenue return and profit return.
Core rules
- Budget methods include objective-and-task, percentage of sales, competitive parity, and share of voice. Each has a bias; objective-and-task is the most defensible when costs are known.
- Build the budget from required impressions or conversions and benchmark costs, then add production, agency fees, and a contingency, commonly 5-10%.
- ROAS = revenue / media spend. ROI = (profit - investment) / investment. Break-even ROAS = 1 / gross margin.
- Marginal ROI falls as spend scales. Evaluate the next increment, not the average.
- Agency compensation models include commission, fixed fee, retainer, and performance-based; match the model to the behavior you want.
Worked example
$100,000 of media produces $400,000 of revenue, a ROAS of 4. At a 25% gross margin, gross profit is $100,000, so profit after media is zero and ROI is 0%. Break-even ROAS is 1 / 0.25 = 4.0. The campaign is exactly at break-even. A 10% media efficiency gain creates $10,000 of profit. If production and fees added $20,000, the campaign would lose money despite the healthy-looking ROAS.
Traps that cost marks
- Treating ROAS as profit.
- Ignoring margin, fixed costs, production, and fees.
- Comparing ROAS across channels with different margins.
- Setting next year's budget as last year's percentage without a task.
- Assuming average ROI holds at a larger budget.