Introduction
Marginal ROI (Return On Investment) is an important metric in media budget optimisation. Marginal ROI for a media channel answers the following question:
If an additional euro/dollar is invested into the channel, how much additional sales will the channel drive?
Calculating Marginal ROI
Marginal ROI can be calculated as a derivative of the diminishing return curve (also referred to as "response curve"), using the current investment level. Formula for Marginal ROI:
Marginal ROI = Δ S / Δ I
where
Δ S = Incremental Sales
Δ I = Investment
For example, if our media investments are in point A of the diminishing returns curve (picture below), we would calculate marginal ROI as the derivative of the diminishing return in curve in that point:
If investments to the marketing activity are increased, we start moving up the curve, and the Marginal ROI starts to decrease. Below is an example, where the investments have increased to Point B. In this point, each additional euro/dollar drives a lot less sales compared to Point A.
How is "Marginal ROI" different from "ROI"?
ROI (Return On Investment) provides the return that each marketing activity has generated on average during a certain timeperiod. This is helpful when comparing historical performance across different activities. However, the ROI metric does not tell which activity provides the highest return if one more euro/dollar is invested in it. Read more about ROI here: Marketing ROI.
As an example, the picture below shows response curves for Channel A and Channel B. The dots on the curves indicate current investment levels, which are the same for both channels. When looking at the chart, we learn two things:
With the same level of investment, Channel B is driving more incremental sales, meaning that it currently has higher ROI.
However, when looking at the slope of the curve at the current investment level, we can see that Channel A has higher Marginal ROI than Channel B, because Channel B has started saturating faster than Channel A.
If we would allocate one additional euro/dollar to one of these channel, we would choose Channel A, because it would drive more sales with the additional spend, even if its current average ROI is lower than Channel B.
Using Marginal ROI in everyday marketing planning
Marginal ROI is helpful for the marketer in many ways.
Identifying channels and campaigns, which are saturated and ones which are can be scaled further. If a marketer gets additional media budget, Marginal ROI helps the marketer identify channels and campaigns that can be scaled further. On the other hand, if the marketer finds channels or campaigns with a very low Marginal ROI, it is likely that the level of investment is far beyond the saturation point, meaning that it might be a good idea to re-allocate investments to other marketing activities. As an example, in the picture below, marketing activity in Point A has lots of room for scaling, but marketing activity in Point B has saturated already.
Finding the optimal media mix across markets, brands, channels, campaigns. Using Marginal ROI, the marketer can find a media budget allocation that maximizes its sales impact. However, this is a non-linear optimization problem and very laboursome to do manually in practice. In addition, there's many things affecting the mathematical optimization, such as
External factors, such as seasonality in demand and media prices, influence how marketing returns behave in certain timeperiods
Marketing investments vary over time, which means that the Marginal ROI comparison for each day and week might be different
The easiest way to answer the question of where to invest the next additional euro/dollar, is to use an automated media optimizer tool, such as Sellforte's Media Optimizer (screenshot below).
You can try the Optimizer in Sellforte's public demo: https://demo.sellforte.com/
Considerations
Marginal ROI should not be confused with Margin ROI, which is typically used to refer to marketing's return in terms of profit margin (in contrast to sales).