Optimizing for ROAS vs Optimizing for Marginal ROAS

ROAS

​Return on Ad Spend (ROAS) is a well-known key performance indicator (KPI) in digital marketing. It measures the revenue generated for every dollar spent on advertising. It's calculated by dividing the revenue from an advertising campaign by the cost of that campaign:

ROAS=Ad Spend /Revenue​

Marginal ROAS

Marginal Return on Ad Spend (Marginal ROAS) measures the additional revenue generated from each additional dollar spent on advertising. Unlike average ROAS, which evaluates the overall efficiency of a campaign, marginal ROAS focuses on the incremental return from increased investment.

This distinction is critical because advertising performance often follows the law of diminishing returns — as you increase spend in a particular channel, each additional dollar typically yields less revenue than the previous one. This can be explained by factors like audience saturation, limited inventory, and/or growing competition. By measuring marginal ROAS, marketers can pinpoint where this drop-off begins and make smarter budget allocation decisions.

Limitations of ROAS

While a high ROAS may indicate that a campaign is performing well, it doesn’t reveal how returns change as spend increases. Without accounting for diminishing returns, marketers may continue to pour budget into channels that are already saturated or past their most efficient point.

Ad Response Curves: Visualizing Diminishing Returns

Ad response curves graphically represent the relationship between ad spend and consumer response, illustrating how returns change with varying investment levels. These curves help identify the point at which additional spending leads to diminishing returns, guiding marketers in optimizing their budgets. ​

Practical Application

Consider two advertising channels:​

• Channel A: An initial $1000 investment yields $5000 in revenue (ROAS = 5). Increasing the spend to $2000 results in $6500 total revenue, indicating a Marginal ROAS of 1.5.

• Channel B: An initial $1000 investment yields $4000 in revenue (ROAS = 4). Increasing the spend to $2000 results in $7000 total revenue, indicating a Marginal ROAS of 3.

Despite its higher starting ROAS, Channel A’s incremental performance drops sharply, suggesting diminishing returns. Channel B, on the other hand, delivers more efficient growth with additional investment.

TL; DR Key Differences Between Optimizing for ROAS vs Marginal ROAS

Wrapping Up:

Both numbers matter—they just answer different questions. Average ROAS tells you how well the channel performs overall; marginal ROAS tells you whether it's worth spending more. Focusing solely on ROAS can be misleading, as it doesn't account for diminishing returns that often accompany increased ad spend.

By analyzing marginal ROAS, marketers can:​

• Optimize Budget Allocation: Identify which campaigns or channels are delivering profitable growth and which are approaching saturation
• Prevent Overspending: Recognize when additional ad spend no longer produces proportional returns, avoiding inefficient budget use.​
• Maximize Profitability: Allocate resources to areas with the highest incremental returns, ensuring sustainable growth.

Ready to move beyond ROAS? Start optimizing for marginal ROAS to uncover real growth opportunities and avoid wasted spend. Curious how to get started? Get in touch with our team to learn more and see a demo of our paid media optimizer.