Think Hard About The Next Dollar You Spend On Search – Are You Maximizing Your Marginal ROI?

Think Hard About The Next Dollar You Spend On Search – Are You Maximizing Your Marginal ROI?

The transparency of search as an advertising channel is appealing to marketers as it makes it relatively easy to forecast acquisition outcomes and to measure ROI. And, CFOs love the apparent certainty of it when it comes time to approve budgets.

B&T Magazine
Posted by B&T Magazine

That’s why search is often the first tool in the kit that digital marketers reach for when they want to fill the funnel, with the majority of spending going to a single, dominant publisher.

However, an analysis of actual paid campaign data by Kenshoo suggests that by thinking smarter, marketers can maximize their returns across publishers by focusing on what is known as marginal ROI.

ROI is calculated simply by dividing total revenue by total spending, whereas marginal  ROI only looks at the impact of an incremental increase in campaign spending on revenue.

For example, if you increase spending on a campaign from $80k to $100k and you generate an extra $30k in spending, then the marginal ROI is $30k/$20k or 1.5.

The chart below provides a simple illustration of the idea.

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(Image source: Kenshoo)

As the report notes, “The marginal ROI is the slope of the curve that you get when you plot predicted revenue against spend, and it depends on where you are on the x-axis.”

As the curve flattens the ROI on every incremental dollar starts to decay. The trick for advertisers then is to work out where on the curve they are.

In a study commissioned by Microsoft, nine Kenshoo paid search programs were analyzed to determine which publisher yielded the best return on the next dollar of investment.

According to the authors of Maximizing Paid Search Potential by Measuring Marginal ROI, in five of the nine campaigns studied it would make more sense for the marketer to invest their next dollar on Bing. Three cases showed that dollar could be better spent elsewhere, and the final case delivered no clear differentiation between publishers.

The report states that, “Given the nature of the paid search market, it should not be altogether surprising that Bing holds a bit of an edge here. For example, marketers frequently put many of their eggs in the basket of a single search engine, where they may face greater competition and price pressure, and subsequently receive a considerable amount of attention and optimization.”

As a result, they say, “the next most immediate opportunity for efficiency might be on another publisher.”

The authors also suggest that spending on a less dominant publisher is more likely to be taking place in the earlier “steeper” part of the ROI curve, and therefore offering a stronger opportunity for marginal ROI.

As spending increases on the publisher the curve flattens and the differentiation and advantage lessens.

According to the study, “The net result is that marketers using Bing Ads as part of their paid search strategy may well be able to benefit from a higher marginal ROI for their next dollar of investment, and should keep this in mind when analyzing and optimizing their campaigns.”

The report offers four key takeaways for marketers;

  •   Forecasting tools can be applied creatively to help understand which paid search publishers have the best upside potential.
  •   By forecasting the Marginal ROI of each publisher individually (rather than overall ROI), marketers can compare the value of incremental spending with those different publishers.
  •   As publishers and channels proliferate, deeper understanding of Marginal ROI and its relationship to program effectiveness will be increasingly important for the agile marketer.
  •   When applied to primary paid search publishers, Kenshoo found greater incremental spending opportunities for Bing in a majority of analyzed cases where search publishers were forecast separately.

“New channels and publishers are emerging regularly, and each of those will present opportunities for marketers to gain additional traction with their customers. Strategic use of portfolio-based forecasting across channels and publishers is a valuable tool in the marketing toolbox that can help make sense of those opportunities and help you make smarter, more data-driven decisions, and put you on the path of being a truly agile marketer,” according to the study.

This article originally appeared at