May 24, 2024 by Cyril Noirot
Optimal weekly pressure
Optimizing ad spend is crucial for maximizing returns especially when you know that not all ad expenditures yield the same return. Identifying the “sweet spot”—the range where ad spend is most effective—is key to maximizing profitability.
Understanding ROAS and marginal ROAS
ROAS (Return on Ad Spend)
Definition: ROAS measures the total revenue generated per dollar spent on advertising.
Calculation:
$$ ROAS =\frac{IncrementalSales}{Ad Spend} $$
Interpretation: ROAS provides an overall view of how effectively your ad spend translates into revenue.
Marginal ROAS
Definition: Marginal ROAS assesses the additional revenue generated by each additional dollar spent on advertising.
Calculation: The derivative of the ROAS function, representing the incremental change in revenue for an incremental change in ad spend.
Interpretation: Marginal ROAS helps identify the efficiency of each additional dollar spent, highlighting where diminishing returns start.
The sweet spot: between max marginal ROAS and max ROAS
Max Marginal ROAS
At this point, each additional dollar spent on advertising yields the highest incremental return.
This is the point of highest efficiency in terms of incremental gains from additional spending.
Beyond this point, each additional dollar spent generates progressively lower returns (diminishing marginal returns).
Max ROAS
At this point, the overall return on all advertising dollars is maximized.
Beyond this point, the cumulative effect of additional spending may still increase revenue, but at a diminishing rate, eventually leading to inefficiency and potential overexposure (ad fatigue).
Sweet spot
The optimal range can be found by identifying the interval where the first derivative is high (indicating rapid growth) and the second derivative changes sign (indicating the start of diminishing returns).
The range between the maximum marginal ROAS and maximum ROAS represents the optimal balance between incremental gains and overall efficiency.
Within this range, advertisers can maximize returns without overspending and causing ad fatigue.
This range ensures that the additional ad spend is effective in driving revenue while maintaining a high overall return.
Key insights
Based on this graph we can define some key guidelines to our marketing team:
Rule 1: The shaded area between the maximum MROAS and maximum ROAS give you some upper bond and lower bound on how to set your weekly pressure. Concentrate your ad spend within this sweet spot to balance between high incremental gains and overall campaign efficiency. Indeed Spending within this range maximizes returns while minimizing the risk of overspending and ad fatigue.Rule 2: Depends on your marketing strategy and assuming you only want to maximize ROI, set a hard cap on your ad spend at the point of maximum ROAS. Any additional spending beyond this point will reduce your overall return on investment.Rule 3: The point where Marginal ROAS (MROAS) is highest ($3.20 in this graph), focus initial spending efforts around this point. This is where each additional dollar spent yields the highest incremental return. It’s a critical point for maximizing the efficiency of your ad spend.
Conclusion
The sweet spot for advertising frequency lies between the maximum marginal ROAS and the maximum cumulative ROAS. This range ensures that each dollar spent on advertising yields the highest possible incremental return while maintaining overall efficiency. By targeting this range, advertisers can maximize their return on investment, avoid diminishing returns, and prevent ad fatigue.
Understanding the dynamics between ROAS and Marginal ROAS is essential for marketers. By leveraging these insights, they can optimize ad spend strategy, ensuring that advertising efforts are both effective and efficient.