Channel Budget Reallocation at Ride Republic
Ride Republic owns four bicycle shops in one metro area and spends exactly $6,000 per month on marketing. The owner, Marcus, has pulled 90 days of channel data. Paid search: $2,520 spent, 4,200 sessions, 2.4% conversion rate, $140 average order value. Email: $600 spent ($250 platform, $350 freelance designer), $4,900 in revenue attributed through last-click tracking. Paid social: $1,900 spent, $2,300 in attributed revenue. Local print: $980 for a magazine insert whose only tracking is a coupon code that produced $2,700 in revenue. Gross margin across all channels is 38%. Marcus's cousin, who runs a landscaping business, has offered to double the print buy next quarter at a 15% discount if Ride Republic commits now. Paid search shows 78% impression share on brand terms but only 20% on non-brand terms, and the shop's busiest season begins in eight weeks.
1. Using the 38% gross margin, compute revenue, gross profit, profit after ad spend, and return on ad spend (ROAS) for each channel. Rank the channels on a margin basis.
Read the worked answer
Paid search. Orders = 4,200 × 0.024 = 100.8. Revenue = 100.8 × $140 = $14,112. Gross profit = 14,112 × 0.38 = $5,363. Profit after spend = 5,363 − 2,520 = $2,843. ROAS = 14,112 ÷ 2,520 = 5.60.
Email. Revenue $4,900; gross profit = $1,862; after spend = 1,862 − 600 = $1,262; ROAS = 8.17.
Print. Revenue $2,700; gross profit = $1,026; after spend = 1,026 − 980 = $46; ROAS = 2.76.
Paid social. Revenue $2,300; gross profit = $874; after spend = 874 − 1,900 = −$1,026; ROAS = 1.21.
Totals. Revenue $24,012; gross profit $9,125; spend $6,000; net contribution $3,125.
Ranking and the key threshold. Because only 38 cents of each sales dollar is gross profit, the break-even ROAS is 1 ÷ 0.38 = 2.63. Email and search clear it decisively; print (2.76) barely clears it, meaning it is roughly a break-even brand play, not a profit driver; social (1.21) loses money on a margin basis. The ranking is email, search, print, social - and the framing that matters is margin-based, not revenue-based.
2. Marcus proposes moving the entire $1,900 social budget into paid search and accepting the cousin's print discount. Evaluate this proposal using the data and state what you would recommend instead.
Read the worked answer
Where Marcus is right. Social is not paying for itself on a 38% margin: it consumes $1,900 to produce $874 of gross profit. Reallocating some of it is defensible.
Where the reasoning is weak. First, average ROAS is not marginal ROAS. Search already holds 78% impression share on brand terms, and brand search largely harvests customers who would have arrived anyway - its incremental return is far below 5.6. Pumping money into brand terms inflates attributed revenue without adding much. The real headroom is non-brand search at 20% impression share, so any reallocation should be capped and targeted there, with caps on cost per acquisition.
Second, last-click attribution flatters email and search and undervalues upper-funnel work. Some social spend is retargeting and awareness that later converts through search; killing it entirely can depress the channels that look good.
Third, doubling print at a 15% discount means paying about $1,666 for two insertions. Print's margin contribution at current levels is only $46, so it has essentially no cushion for error, and the coupon captures only a fraction of print-driven sales. Committing now, before the season, on the strength of one quarter is a timing and evidence problem.
Recommendation. Keep roughly $500 in social for retargeting and creative testing; move about $1,400 into non-brand search with a target cost per acquisition and a hard monthly cap; run one incremental print insertion in a single market rather than a doubled buy, and measure it with a unique code plus a geographic holdout. Set a decision rule now: a channel keeps funding only if its incremental, margin-based ROAS exceeds 2.63 after a full seasonal cycle.
3. Describe the measurement system you would put in place before the busy season so the next reallocation decision is based on incremental rather than attributed results.
Read the worked answer
Track at the customer and margin level, not the revenue level. Every channel gets a UTM convention, a unique promo code, or a dedicated landing page. Report weekly on gross profit per channel, new versus returning customers, and repeat purchase within 90 days, because a channel that acquires durable customers can justify a lower first-order ROAS.
Build incrementality tests. For print and social, run a matched-market holdout: two comparable metros, one receiving the spend and one not, compared on total sales net of seasonality. For search, run a short brand-holdout or a spend-saturation test on non-brand terms to estimate marginal, not average, return.
Respect diminishing returns. Model each channel's response curve rather than assuming the current ROAS holds at double the spend. Non-brand search at 20% impression share will likely degrade as bids rise; social will saturate a small local audience quickly.
Set decision rules and a calendar. Define thresholds in advance (for example, incremental ROAS ≥ 2.63 on gross margin, and cost per new customer ≤ the 12-month customer value), review at 30 and 90 days, and separate brand-building budgets from performance budgets so they are not judged by the same metric. Document the assumptions, because the next budget conversation will be about the assumptions, not the numbers.