To evaluate the effectiveness of marketing efforts and advertising campaigns, most marketers use ROAS (return on advertising investment), which is calculated by dividing the revenue obtained as a result of the campaign by the investment in the given channel. However, very few of them take into account something as important as incrementality, which, according to Pareto’s law, for each additional euro invested, less revenue is produced than the previous one.

So while your ROAS may seem like a good metric, you may actually be losing money on your campaigns. Incrementality shows the effectiveness of specific marketing campaigns by identifying how much value each new Euro adds to conversion results and revenue. This is why measuring incremental or marginal ROAS is key to analyzing your acquisition and retention campaigns, to draw conclusions.

Today we will discuss how you can use marginal ROAS to optimize your acquisition efforts and spend.

Let’s first …

What is Roas and how to calculate the Roas of a campaign?

Roas is one of the most commonly used metrics in paid campaigns or ads and indicates how much money we are getting in return, compared to the investment made. It is calculated by dividing the revenue obtained as a result of the campaign by the investment in the given channel.

Roas formula

Roas= Direct income obtained from ads/ Total ads expenditure

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How to calculate marginal ROAS?

Now that we know what Roas is, let’s measure incremental values instead of absolute values. Measuring incremental Roas vs. Roas helps you exclude irrelevant conversions or spend data from your calculations. Similarly, measuring marginal ROAS does not take into account organic conversions or conversions driven by other channels or previous campaigns and considers changes in spend.

Roas Incremental Formula

The basic formula for the calculation of is as follows:

However, there is another way to calculate marginal ROAS using historical statistical data. Here is how:

• Create a data set that includes the historical daily spend of your advertising channel versus the CRM revenue attributed to that spend.
• Clean normalize the data using special algorithms such as the ones we use in our platform.
• Visualize it on a line graph aligned by ascending expense and calculate n in the function y = x^n.

With this multiplier in hand, you can now calculate the marginal ROAS:

Marginal ROAS = ROAS * n

In case you have little data or few resources to do calculations, you can use a simple rule of thumb. In our experience, in most campaigns, n lies between ⅔ and ½.

For example, if your baseline advertising investment is 1,000 euros, on which we earn 5,000 euros (i.e. ROAS = 5), each additional euro spent will have a marginal ROAS of 5/1.5 = 3.3. In other words, this gives you a realistic view of the success of your campaigns.

What Roas means for chief marketing officers, chief marketing scientists, chief executive officers and other senior executives

Calculating the marginal ROAS helps to avoid overspending on advertising and wasting money on unprofitable campaigns. When setting the minimum ROAS for marketing campaigns, incrementality should be taken into account.

For example, if you set a minimum ROAS based on breakeven, you may be losing money on certain ads or campaigns, as your marginal ROAS will be, on average, 1.5 times lower.

One of the problems you may face if you have a long sales cycle or deferred revenue is that you may have difficulty calculating ROAS and marginal ROAS in real time. In this case, using predictive revenue calculation models could be helpful. For example, in Nextscenario.com we have developed such models to predict future sales and LTVs of customers.

Roas on Facebook ads

Bid limits and cost limits are two widely used options in Facebook ad campaigns. One of the bidding strategy options is the minimum ROAS, which you can use to optimize the campaign by targeting users most likely to become paying customers.

Indicating the marginal ROAS instead of the minimum ROAS in the bid limit strategy can be useful to optimize ad spend. Thus, if you have a minimum ROAS of 3, for example, it is recommended to multiply it by 1.5 to obtain an optimal result.

However, when optimizing ads by keywords, the minimum ROAS coincides with the marginal ROAS (i.e. the minimum profit you get for spending x euros). In this case, the average ROAS is only needed to calculate the overall performance of the channel.

Final thoughts on the calculation of Roas vs Marginal Roas

Incrementality is something to keep in mind when measuring marketing results and planning new investments. If you don’t take it into account, you can end up with inadequate estimates and excessive ad spend. To help you save more money, at Nextscenario.com we have developed a predictive model to optimize advertising campaigns that takes into account both incremental costs and real-time user behavior, which you can try for free here: Nextscenario.com