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ROI-Based Budget Allocation Model

Framework
EvaluationROI

Definition

Evaluate each channel or campaign on unit economics and volume potential

Related Knowledge

Customer Acquisition Cost (CAC)LTV (Lifetime Value)Return on Ad Spend (ROAS)

The core logic is: evaluate each channel or campaign on two dimensions, unit economics (is it profitable?) and volume potential (can it scale?), then take one of three actions.

A. SCALE (The Green Light) 🟢

Signal: High ROI and high volume potential.

Example

  • Segment: "Software engineering students" on TikTok
  • CAC = $10
  • LTV = $500

    • Analysis

  • Unit economics are outstanding.
  • There is still meaningful audience size to go after.

    • Recommendation

    "Triple the budget immediately. Do not worry if CAC goes up a bit; we have plenty of room."

    Watch-out: Diminishing Returns

  • At $1,000 spend you get the best users.
  • At $100,000 spend you start reaching more average users.
  • As you scale, ROI will drop.

    • Your job is to scale until ROI hits your minimum acceptable limit, not to keep spend flat just because early numbers look great.

    B. PAUSE (The Red Light) 🔴

    Signal: Negative ROI with no signs of improvement.

    Example

  • You sponsor a "Lifestyle Vlog" channel.
  • Cost: $20,000.
  • Outcome: 3 signups.

    • Analysis

  • Even if those 3 users stay forever, the channel loses money.
  • Audience fit is clearly wrong.

    • Recommendation

    "Kill this partnership. Do not renew. Mark 'Lifestyle' as a blocked category."

    The Courage Part

    It is uncomfortable to tell a manager that $20k was wasted. But clearly calling out failed bets is part of a responsible growth function.

    C. EXPERIMENT (The Yellow Light) 🟡

    Signal: Borderline ROI, or good ROI but too little volume.

    Example

  • Channel: LinkedIn Ads
  • CAC: High
  • Users: CEOs (very high LTV)
  • Current performance: roughly break-even.

    • Analysis

    "The quality is there, but ads are too boring. Nobody is clicking, which drives costs up."

    Recommendation

    "Do not kill it yet. Launch 5 new ad creatives. If we can double CTR, costs will drop and this can graduate to a Scale channel."

    Use the yellow state to:

  • Test new creatives, landing pages, or offers.
  • Tighten targeting.
  • Decide, based on data, whether a channel should move up to Green or down to Red.