Case 067Budgeting, variance and reportingCore
Mitravinda Foods spends Rs 80 crore on TV, digital and trade promotions with different returns, and digital's return falls as spend rises. Reallocate the same budget to maximise contribution.
1The situation
Mitravinda Foods makes packaged snacks. Its marketing budget is Rs 80 crore: Rs 40 crore on television, Rs 25 crore on digital and Rs 15 crore on trade promotions, the discounts paid to retailers for shelf displays. The analytics team has measured incremental contribution per rupee spent.
Television returns 1.2x at any level of spend. Digital returns 2.5x on the first Rs 20 crore, 1.5x on spend between Rs 20 crore and Rs 45 crore, and 0.9x above Rs 45 crore, because the cheapest audiences are reached first. Trade promotions return 0.8x. The budget cannot grow.
2Your task
What does the current mix earn, how would you reallocate the Rs 80 crore, and what does the business gain?
Quick check
Digital averages 2.3x today against TV's 1.2x. Should all Rs 80 crore go to digital?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Move Rs 15 crore out of trade promotions and Rs 5 crore out of TV into digital: digital Rs 45 crore, TV Rs 35 crore, trade promotions nil, lifting contribution from Rs 117.5 crore to Rs 129.5 crore on the same budget. Today's mix earns 1.47x per rupee; the new mix earns 1.62x. The rule is to fund spend in order of marginal return until the budget runs out, and digital's marginal return drops below TV's at Rs 45 crore, which is where it stops.
Step 1What does the current budget earn?
Add up each channel's contribution. TV: Rs 40 crore at 1.2x is Rs 48 crore. Digital: Rs 20 crore at 2.5x is Rs 50 crore plus Rs 5 crore at 1.5x is Rs 7.5 crore, so Rs 57.5 crore. Trade promotions: Rs 15 crore at 0.8x is Rs 12 crore. Total contribution is Rs 117.5 crore on Rs 80 crore, 1.47x, and the trade promotions are losing money on every rupee. A return below 1.0x means the company would keep more contribution by not spending at all.
Step 2Why does the marginal return decide, not the average?
Because the question is where the next rupee should go, and the next rupee in digital does not earn 2.3x. Allocate by marginal returnWhat one more rupee of spend earns, as opposed to the average return across all the rupees already spent.: rank every rupee of possible spend by what it would return and fund from the top until the budget is gone. It is like eating at a buffet: the first plate is wonderful, the third is barely worth the walk, and a sensible person stops when the next plate is worth less than the next dish on another table. Digital's first Rs 20 crore earns 2.5x, its next Rs 25 crore earns 1.5x, TV earns 1.2x on every rupee, digital above Rs 45 crore earns 0.9x and trade promotions earn 0.8x. The budget of Rs 80 crore covers the first three blocks and 35 of TV's 40.
Step 3What does the reallocation gain, step by step?
Make the moves one at a time so the interviewer can follow. Move the Rs 15 crore of trade promotion into digital: lose Rs 12 crore of contribution, gain Rs 15 crore at 1.5x, Rs 22.5 crore, a net Rs 10.5 crore. Then move Rs 5 crore from TV into digital, taking digital to Rs 45 crore: lose Rs 6 crore, gain Rs 7.5 crore, net Rs 1.5 crore. The next rupee would come out of TV at 1.2x and go into digital at 0.9x, so stop: the optimum is digital 45, TV 35, trade 0, worth Rs 129.5 crore, Rs 12 crore more than today.
| Channel | Today, Rs crore | Contribution | Reallocated | Contribution |
|---|---|---|---|---|
| TV at 1.2x | 40 | 48.0 | 35 | 42.0 |
| Digital, stepped | 25 | 57.5 | 45 | 87.5 |
| Trade promotions at 0.8x | 15 | 12.0 | 0 | 0.0 |
| Total | 80 | 117.5 | 80 | 129.5 |
Step 4What would make you soften the recommendation?
Three things the measured returns do not capture. Trade promotions may buy shelf space that protects all the other spend; if retailers delist the brand when discounts stop, the 0.8x is not the whole cost of cutting them. A floor of Rs 10 crore on trade, with TV at 25, would still earn Rs 125.5 crore, Rs 8 crore better than today, so the recommendation survives a cautious version. TV may have a reach threshold below which its 1.2x does not hold, which argues for testing a cut rather than assuming the return is flat. And the digital returns were measured at Rs 25 crore of spend; the 1.5x and 0.9x steps are estimates, so move in two stages and re-measure after the first. The finance answer is the ranking; the business answer is to move toward it in steps while watching the numbers that could change the ranking.
Where candidates lose it
The common miss is comparing averages: digital at 2.3x beats TV at 1.2x, so pour everything into digital. Beyond Rs 45 crore digital earns 0.9x, less than TV, and a candidate who does not stop there over-allocates.
The second is leaving trade promotions alone because they are a sales-team decision. A return of 0.8x destroys contribution; the right answer cuts them and then names the shelf-space risk as the reason to phase the cut.
What the interviewer asks next
- The budget is cut to Rs 60 crore. What goes?
- Digital's return above Rs 45 crore is revised to 1.3x. Does TV still get Rs 35 crore?
- How would you set up a test to check whether TV's 1.2x holds at Rs 35 crore?
Company names and figures are illustrative.