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Marginal ROAS (marginal return on ad spend)

Marginal ROAS is the revenue that each extra unit of ad spend brings in at the current level, while ordinary ROAS is the average across all spend.

How it works

ROAS is an average: all revenue divided by all spend. Marginal ROAS looks only at the latest increase in spend and the revenue it brought. As spend grows, each next increase usually returns less than the one before.

So a campaign can keep a high average while its latest increase already returns less than its break-even ROAS. From that point, more spend still adds revenue but takes away profit.

Google’s Meridian documentation uses the same idea in marketing mix models: a marginal return much lower than the average means a channel is beginning to saturate. Meridian calls the two marginal ROI and ROI and counts only the revenue the ads added, not all the revenue Google Ads credits. The marginal ROAS guide shows where profit stops growing.

Formula

(Revenue after − revenue before) ÷ (spend after − spend before)

Example

Example store, not client data.

The tableware shop raises monthly spend from 40,000 to 50,000, and revenue grows from 180,000 to 205,000. Average ROAS slips only from 4.5 to 4.1. Marginal ROAS = (205,000 − 180,000) ÷ (50,000 − 40,000) = 2.5, below the shop’s break-even ROAS of 2.86. At a 35% margin, the extra 10,000 brought 8,750 of gross profit, so profit after ads fell by 1,250.

Not to be confused with

  • Incrementality — sales that would not have happened without the ads at all. Its ratio, incremental ROAS, compares ads with no ads; marginal ROAS compares two levels of spend.

Right and wrong readings

  • Wrong: “Average ROAS is still 4.1, well above break-even, so the budget can keep growing.” Right: the last 10,000 returned 2.5, below the line of 2.86. The average hides it by mixing in the earlier, better-paying spend.
  • Wrong: “From August to September spend rose by 10,000 and revenue by 25,000, so marginal ROAS is 2.5.” Right: season, prices and assortment move revenue too. The difference is marginal ROAS only when nothing else changed between the periods.

Sources