ROI and Incrementality: Digital Marketing’s Power Couple

ROI and Incrementality: Digital Marketing’s Power Couple
  • In describing the dilemma he faced when running newspaper ads, businessman John Wanamaker (1838–1922) famously said: “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.

    Fast forward 100 years and digital marketing platforms are providing companies with a wealth of data. Managers today are well-equipped to assess the Return On Investment (ROI) of their digital marketing efforts but now face a different type of dilemma: “I am allocating paid marketing dollars to the best ROI channels, but that isn’t resulting in a good overall ROI.” This dilemma is essentially a paradox that we’ll call the digital paradox. However, unlike the Wanamaker dilemma, the digital paradox is easier to solve. It requires not looking at paid marketing ROI in isolation, but rather in combination with the notion of incrementality.

    ROI and The Digital Paradox

    In digital marketing, ROI is often expressed as Return On Ad Spend (ROAS):

    • ROAS = revenue derived from ads/dollars spent on these ads

    For a manager allocating budget by channel, it would seem logical to calculate the ROI of each paid channel and allocate more budget to channels with higher ROI. However, such an approach is likely to result in a suboptimal budget allocation and to lead to a disappointing overall paid marketing ROI (or blended ROI, defined as total revenue divided by dollars spent on ads). For instance, a common source of frustration for new clients we’ve onboarded at Superbolt is the large budget they allocated to branded search channels that, in isolation, showed amazing ROI. But when this budget was scaled, the performance failed to move the needle in terms of total sales. Understanding this frustrating result requires a good grasp of incrementality.

    Incrementality

    When observing people who convert after interacting with an ad, we can define two different buckets:

    • Those who would have converted with or without ads
    • Those who converted because they interacted with an ad

    For those in the second bucket, the ads drove incremental purchases, while for those in the first bucket they didn’t. In general, the higher up a potential customer is in the marketing funnel, the more incremental an ad is likely to be.

  • Let’s look at the two largest digital marketing platforms to illustrate the concept of incrementality:

    • A Google Ads ad targeting someone searching for a product category (unbranded query) is likely to be incremental, while a Google Ads ad targeting someone searching for a brand name (branded query) is significantly less likely to be incremental (for branded queries, incrementality depends on whether competitors and/or retailers are bidding on your brand).
    • The same logic applies to Facebook Ads when targeting someone who has never visited a brand’s website (prospecting) versus someone who has already visited the website (retargeting). Prospecting is very likely to be incremental, whereas retargeting is less so.

    These examples demonstrate that having the right structure in place on each paid marketing platform is key to understanding and managing incrementality. For instance, branded and unbranded should be segmented into two different channels on Google Ads, as should prospecting and retargeting for Facebook Ads. Further, the split between prospecting and retargeting applies to many more paid marketing platforms, such as Pinterest or programmatic platforms.

    Conclusion

    With this in mind, a manager working on budget allocation should be taking into consideration not only ROI per channel, but also its incrementality level. Prioritizing high incrementality channels is key in order to continuously feed the top of the marketing funnel with new potential customers, which will, in turn, be targeted by lower-funnel channels with higher ROI.

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