Incremental ROAS measures the return on the next dollar of ad spend, always lower than a brand’s average ROAS. This happens because the earliest dollars spent are the most efficient, so each new dollar returns less. Marketers who assume a 3x average ROAS means the next dollar also returns 3x overestimate new spend and miss growth targets. This video explains why even incrementality-tested ROAS still overstates new spend returns.
Why Incremental ROAS Is Always Lower Than Your Average ROAS
Incremental ROAS is always lower than average ROAS because the earliest advertising dollars in any budget are the most efficient ones, and every dollar spent after that works a little harder for a little less. In this video, John Wallace, CEO of LiftLab, breaks down the biggest mistake he sees repeatedly in marketing forecasting spreadsheets: taking a ROAS figure, say 3, and assuming the next dollar spent will return $3 as well. That reasoning fails immediately because it treats a non-incremental ROAS as if it were incremental.
The mistake goes deeper than that. Even a properly run incrementality test that lands on a more honest figure, like 2.5, still overstates what the next new dollar will return, because that 2.5 average includes the earliest, most efficient dollars already spent. Forecasting the true performance of net new budget, not the historical average, is what separates accurate marketing forecasts from ones that miss their targets.
In this video, you’ll learn:
Why non-incremental ROAS does not accurately represent the potential gains from increased ad spend
The distinction between average efficiency and the efficiency of new, additional marketing dollars
Why new budget performance is almost always lower than the average performance of historical spend
The importance of quantifying the incremental performance of new budget to distinguish between effective and ineffective marketing strategies
TIME STAMPFull Video Transcript: The Incremental ROAS Forecasting Mistake Explained
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In this video, John breaks down the most common mistake he sees in marketing forecasting: treating average ROAS as if it predicts the return on the next dollar spent.
[0:00 – 0:42] The Biggest Mistake in Marketing Forecasting
What is the biggest mistake in marketing? The one that I see over and over again is actually related to marketing forecasting. I have seen many spreadsheets put together by teams that take a number, which is a ROAS (Return on Ad Spend), and they use that ratio in this fashion. They say, “My ROAS is 3. Therefore, if I spend another unit, a dollar, a Euro, a pound, I will get 3 in return.” This is simply not true, and there are two reasons why it is not true. There is a clear one: that is not an incremental ROAS. So, yes, non-incremental ROAS, you might think it is going to go up by 3, but you are not going to make $3. It does not get you $3 closer to hitting your total forecast for the period, and most marketers, when this is discussed, they will recognize this.
[0:42 – 1:22] The Performance of New Budget
But there is a second mistake. So, even if you have done an incrementality test and everything was statistically significant and everything worked the way you hoped, it is not a true saying to say that if I spend a dollar, I will get 2.5 back. And why is this? It is because part of the performance that yielded the 2.5, on average, are the earliest dollars in. That spend performs better; it is more efficient. And therefore, if I am forecasting and I am trying to make a decision of how much more money should I spend, I need to recognize the performance of the net new budget, and it is going to be, I guarantee you, at less than 2.5, and quantifying that number separates the winners from the losers.
Key Lessons: Forecasting With Incremental ROAS Instead of Averages
The ROAS fallacy: Assuming that a historical ROAS ratio will apply linearly to future budget increases is mathematically incorrect. It fails to reflect true incremental growth.
The law of diminishing returns: The earliest ad dollars are generally the most efficient. As you increase spending, the efficiency of those new, net-budget dollars will inevitably decrease, meaning the return will be lower than your current average.
Strategic forecasting: Winners in marketing forecasting are those who correctly quantify the incremental performance of additional spend rather than relying on stale or non-incremental averages.
