Many of us sit through presentations that roll out the overused but euphonious John Wannamaker quote, “Half the money I spend on advertising is wasted; the trouble is, I don't know which half.” When I hear this quote, or something like it, I always think to myself, “If John had known the marginal profitability of each dollar he spent, he would have known exactly how much was wasted and which half, quarter, dime, or even penny it was.” Furthermore, one would know how to mitigate such inefficiencies in the future. The reason I’d never say it out loud is because for a long time I took for granted the notion that most managers of marketing investments kept this fine wisdom in their back pocket. Much to my chagrin, this thinking is wishful.
So what does this fine wisdom tell us? It tells us that, subject to financial and capacity constraints, for an allocation of financial resources across a portfolio of marketing investments to be an efficient allocation, there must be no alternative allocation that would yield higher returns. We know this because calculus dictates that at this efficient allocation only one of two possibilities exists: either financial resources are exhausted and funds cannot be reallocated to improve returns, or… financial resources are not exhausted and spending one more or one fewer dollar yields lower returns. This is what is referred to as the zero marginal profitability condition -- i.e., the condition for optimality.