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Calculating Incremental ROI
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Return Over Ad Spend (ROAS) is one of the key metrics monitors by marketers everywhere.
The logic is simple: If the revenue gains are higher than the ad spend used to acquire customers - the investment was beneficial.
Most would assume that positive ROAS means incremental ROI.
But ROAS does not mean incremental ROI. Especially when relying on traditional attribution methods.
The Formula is Correct. The Math is Broken.
Calculating Simple ROI
ROI is the initials for Return Over Investment. Advertising spend being the "Investment" asset, while the revenues generated as a result of Advertising represents the return.
It is common to credit only the direct sales attributed to advertising, however, Advertising could be generating an impact over sales results, even if those are not attributed.
Example of incremental ROI is a campaign where users are exposed to. While only a small percent of users will click the ads and convert, it is just as likely that users will convert without having clicked the ad as seeing the advertising again and again creates a feeling of trust in the brand.
The Definition of Incremental ROI
While calculating ROAS means summing up the revenues from paid media attributed results and dividing those with the media costs, Calculating Incremental ROI is very simple:
Total Revenues (across all channels) / Total Media Costs = ROI
How to Calculate Incremental ROI to Make Better Marketing Decisions ?
The graph and table below show the reported ad spend and revenues from new customers attributed to “new vendor”.
Based on last touch attribution data - this new vendor generates a nice return on investment.
Measuring Impact: The Beginnger's Guide to Incrementality
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Return Over Ad Spend ignores total ROI, leading marketers to waste and non incremental results. Uber and AirBNB found that over 80%(!) of their performance advertising spend was redundant. And this is just the tip of the iceberg.
Calculating Incremental ROI
Incremental return over investment takes a more holistic approach to measurement, always monitoring the results across the board, while taking into account the results as reported by last-touch attribution and media cost data.
This approach looks at the conversion changes caused by paid marketing, to come up with an understanding of the real incremental sales lift and incremental ROI.
Measuring incrementality requires a continuous layer of prediction analytics overlaid above every comparable combination. Creating a synthetic cohort allows our platform to monitor the difference in difference and come up with digestible insights to marketers.
E.g. “The ROAS for ‘New Vendor’ is cannibalizing Organic traffic. Stopping the activity with ‘New Vendor’ will lead to positive incrementality”
This would mean that while the new vendor’s ROAS looks positive - the total ROI decreased.
Challenges With Marketing ROI
When zooming out to see overall results, the user acquisition graph looks as follows:
This article procides a quick guide to interpreting incremental ROAS:
- How to Calculate the Return on Investment (ROI) of a Marketing Campaign
- How to Calculate Incremental Revenue for Marketing (Absolute and incremental measurement)
- How is Marketing ROI (Return on Investment) Calculated?
- Everything marketers need to know about incrementality testing
- Incrementality in performance advertising
- The scientific method of measuring marketing effectiveness
- The advantages of incremental measurement
- What is Incrementality in Marketing?