Cost-Benefit Analysis (CBA)

• informed decision-making
• a strategic metric
• a performance metric
• a financial decision-making tool
• balance short-term and long-term gains,
• manage risks 
• ensure resources are deployed where they generate the most value
• CBA = Total benefits/Total costs
• assess whether the benefits of taking a particular action (both financial and non-financial) outweigh the associated costs
• systematically compare the benefits of a marketing initiative to its costs = > resource allocation.
• evaluate the effectiveness and impact of marketing initiatives.
• compare the costs and benefits of a project,  investment, decision or strategy => determine its feasibility and value
• quantifying all the costs and benefits associated with a decision
• CBA ratio > 1 =benefits outweigh the costs
• CBA ratio < 1 = costs exceed the benefits

CBA in financial metrics

• evaluate the financial returns from a project or initiative
• if the potential increased revenue or cost savings are large enough to justify the initial and ongoing costs
• Benefits:
  -increased sales,
  -cost savings,
  -improved efficiency
  -intangible benefits (enhanced brand value)
• Costs:
  -direct expenses (labour, materials and marketing spend)
  -indirect costs (opportunity costs – resources could have been allocated elsewhere)
• Example:
  – the total cost of running the marketing campaign (advertising, creative development, etc.) vs revenue or leads it generates

CBA for strategic decision-making

• for significant long-term projects
• financial returns (ROI or ROMI) + non-monetary factors (brand positioning, market entry risks or customer satisfaction).
• launch of a new product – look at (difficult to quantify, but integral):
  – projected sales
  – potential for increased market share
  – improved brand perception
  – long-term customer loyalty
• capital investments/expansions (expanding into new markets, opening a new branch) = > the upfront investment costs vs the long-term benefits (increased market reach or economies of scale)

CBA for operational efficiency

• investing in new technologies or changing processes =>enough operational benefits to justify the cost?
• cost of acquiring and retaining a customer vs customer lifetime value (CLV) = >
• marketing spend and operational costs of acquiring and keeping customers will be justified by the revenue they will generate over time?
• $100 to acquire a customer
  – CLV is only $50, the CBA => the acquisition cost exceeds the lifetime revenue = effort inefficient
  – CLV is $200 over their lifetime=> the benefits outweigh the costs => a sound investment.

CBA for risk assessment

• potential risks
  – market volatility,
  – changes in customer behaviour
  + expected benefits = comprehensive view = whether a decision is worth pursuing.
• launching a new product in a competitive market? factor risks:
   – financial risks (potential for lost revenue if the product fails)
  – projected benefits (market growth, new customer acquisition)
• identify areas where risks can be mitigated
  project costs are high due to uncertainty?
  – additional market research
  – testing to reduce risks