Why is Marginal ROI relevant?
Marginal ROI is an important metric in marketing budget optimisation. Marginal ROI is helpful in assessing the following question:
If I get one more euro/dollar of marketing budget, where should I invest it?
Marginal ROI helps by telling which activity provides the highest ROI for the next invested euro/dollar.
How is "Marginal ROI" different from "ROI"?
ROI (more here: Marketing ROI) 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.
Calculating Marginal ROI
Marginal ROI can be calculated as a derivative of the diminishing return curve, in the point where the investments are on the diminishing return curve.
Marginal ROI = Δ S / Δ I
where
Δ S = Incremental Sales
Δ I = Incremental 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.
However, we notice, that if we calculate the marginal ROI in point B of the same curve (picture below), the marginal return for an additional invested euro/dollar will be smaller.
Using Marginal ROI in every day marketing planning
In practice, it is very laboursome to manually analyse the initial question of where to invest the next additional euro/dollar, because:
Marketing investments vary over time, which means that the marginal ROI comparison for each day and week might be different
Other factors, such as seasonality, influences how marketing returns behave in certain timeperiods
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), which one can try out without sign-up or login here: 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).