Marginal ROI Explained in Simple Terms

I’ve read a few articles on this topic and I feel like it’s being complicated.

Definition

In a nutshell, according to Google, it’s:

additional return-on-investment you get from additional spend

It’s all about taking a chunk of your budget and asking whether it’s in the right place (or asking if it will be in the right place).

For example

Let's say we’re spending $20k in Google Ads each month on Search and Shopping.

• $5k on Search. ROAS: 300% (for every $100 we get $300 in sales)
• $15k on Shopping. ROAS: 500% (for every $100 we get $500 in sales)

A simplistic (and likely wrong) view is to take the Search budget and put it all in Shopping. However, that decision can’t be made comparing the ROI (ROAS).

You have to compare the Marginal ROI - the potential of the additional $5k.

The Shopping $15k has an ROI of 500% but the additional $5k is likely to have a lower ROI thanks to higher CPCs and lower Conversion Rates (as a general rule).

Of course our unit of $5k could be anything. We might instead look at $1k and decide its marginal ROI would be better in the Shopping campaign.

Data Reliability

I should add a note on the reliability of the data we’re looking at.

In this instance, we might assume the $5k has generated enough conversions that the 300% ROAS is an accurate reflection of what’s to come.

Often, such as when looking at Search Terms, that isn’t the case. We need to think about both the Marginal ROI and whether we’re comparing apples to apples. We need to give channels, campaigns, search terms, etc. enough time before making decisions.

 

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