The marginal value of marketing spend is what the next dollar returns, not the average. This matters because a 2.5x ROAS test blends in the earliest, best-performing dollars, so multiplying it out overstates new spend. Without tracking marginal value by channel, marketers can’t tell finance what to cut, and reach saturates fast. This video explains how to use marginal value to reallocate budget and build credibility with finance.
Why the Marginal Value of Marketing Spend Beats an Average ROAS Number
The marginal value of marketing spend beats an average ROAS number, because an average blends together the easiest, highest-converting dollars with the harder ones that came later, and only the marginal number tells you what the next dollar will actually do. In this conversation, John Wallace, Jon Lorenzini, and Dr. Koen Pauwels tackle a mistake Wallace calls extremely common: running a successful incrementality test, getting back a number like 2.5x ROAS, and assuming the next dollar spent will return the same 2.5x. It won’t, because that 2.5x is an average across dollars that performed very differently.
Lorenzini frames the fix as knowing the shape of each channel’s diminishing returns curve well enough to “take from the poor and give to the rich,” moving spend toward channels still in the money and away from ones that have saturated, remarketing lists being a classic example of a channel that saturates fast after a steep early curve. He argues marginal value, the slope of that curve at the current spend level, not the incremental average, is what should actually drive reallocation decisions. Dr. Pauwels connects this directly to a credibility problem he sees constantly consulting for finance departments: marketing teams are quick to ask for more budget for the next big thing, but go silent when asked what could be cut. Knowing which channels were efficient last year but have since passed their point of optimal efficiency is exactly the answer finance is looking for. Pauwels closes with a related point on reach itself: the first customers reached are typically the highest-propensity ones, so doubling reach doesn’t come close to doubling revenue, a perfectly reasonable trade-off for market share, but not one to mistake for equal efficiency.
In this video, you’ll learn:
Why multiplying average ROAS figures leads to inaccurate budget projections
How to identify and map the diminishing return curves for different marketing channels
The importance of focusing on marginal performance rather than average returns when scaling
How to professionally justify marketing budget reallocations to finance departments
Why increasing reach often results in lower ROI compared to initial, targeted investments
TIME STAMPFull Video Transcript: The Marginal Value of Marketing Spend Explained
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In this conversation, John Wallace, Jon Lorenzini, and Dr. Koen Pauwels explain why marginal value, not average ROAS, should drive budget reallocation and finance conversations.
[0:00 – 0:35] The Common Mistake in Marketing Investment
[John Wallace]: The most common mistake I see made in marketing, and I see it happen over and over again, is, you know, hey, maybe we know that the ROAS that we see in the platforms is not right. Let’s go run an experiment. Even with a successful experiment, let’s say we see, instead of seeing a ROAS of five, it’s 2.5. Let’s just pick that number. The most common mistake I see in marketing is to say, oh, that means if I spend another dollar or euro, I’ll get 2.5, and that’s just not true. So, sorry to burst your bubble, but I’ve seen a lot of spreadsheets that take that 2.5 and put it right in there and multiply it out.
[0:36 – 1:36] Reallocating Based on Diminishing Returns
[Jon Lorenzini]: I think I’m going to answer this question with rules of thumb that really come from industry. It’s to know the shape of the diminishing return curve for all of the channels, and then you can kind of game it, if you want to call it, or goal seek it, and say, continue to reallocate where that spend is in the money, and take away from channels where the spend is saturated or not performing as well. And I have an expression for that that we use at LiftLab: it’s take from the poor and give to the rich. So take from the poor performing channels, give to the stronger performing channels. Another good example would be remarketing lists. They might be super effective, but they cap out and saturate quicker, so you’ll have that steep curve in the beginning and then it’ll flatten out pretty quickly. Just because you were successful with your first couple dollars doesn’t mean you should light your second half of your dollars on fire and have a good average.
[1:37 – 2:01] The Importance of Marginal Value
[Jon Lorenzini]: I think really that marginal value, that last dollar performance, is extremely important for your optimization and allocation decisions. If you’re not using marginal, if you’re just using incremental ROAS, you’re using that straight line that John spoke about. If you’re using the marginal diminishing returns curve, then you’re saying, what is the slope at each point of that investment, and when it starts to get too flat, you should probably reallocate that somewhere else.
[2:02 – 2:38] Identifying the Missing Piece for Financial Planning
[Jon Lorenzini]: Or said another way, my example: if you spend a dollar and you’re not going to get 2.5, because I made that statement as a bold statement, the missing piece of information is, how much am I getting? And hopefully it’s not less than a dollar. I think every marketer is comfortable saying, if I’m going to spend a dollar and make less than a dollar, I should question that, or I can only do it temporarily. And so that’s the missing piece to answer that: when I’m spending and I’m not getting 2.5, like my incrementality test says I’m going to get 2.5, that’s on average, that’s including the earliest, highest-performing dollars. So what is the revised answer? That’s what you need in your spreadsheet to decide how to reallocate.
[2:39 – 3:17] Bridging the Gap Between Marketing and Finance
[Dr. Koen Pauwels]: I think, you know, very often as marketers, right, I think most people in the audience are also marketers, we are used to being the champion for our new spending and our new big thing. And so whenever I talk to the finance department, and half the time I’m getting hired by the finance folks, by the way, in companies, that’s their big issue with the marketing department. They’re like, every year they come to us, we have to spend so much on the shiny new thing, and then I ask, so what can we cut, and there’s absolute crickets. Knowing which things were last year perfectly effective and efficient, but this year they’re still effective but they have passed the point of optimal efficiency, I think really helps you in answering some of these questions and getting more credibility.
[3:18 – 4:17] Saturation and Efficiency in Reach
[Dr. Koen Pauwels]: As marketers, we know that there is saturation, or diminishing returns, in frequency. We have a whole discussion about, depending on your category, what is the optimal number of times you have to touch a potential customer to get their business. But there is some diminishing return there. What I see very often is people assuming there’s no diminishing returns in reach, and I completely go against that. If your marketers are doing a good job, and your publishers, the first hundreds of thousands of customers that you reach with your message are probably the ones with the highest propensity to convert. So if you’re now doubling the reach, then you should expect a lower ROI. To John’s point, that may be perfectly fine, because you have big resources and you want to have a big share of the market. But don’t expect the same efficiency from the next million as from your original million that you have carefully selected and targeted. Doubling from one to two million in spend, you’re not going to double your revenue.
Key Lessons: Using Marginal Value to Reallocate Budget and Win Finance Trust
Investment strategy: Prioritize marginal value over average ROAS to ensure each additional dollar spent remains profitable.
Budget reallocation: Adopt a strategy of taking funds from saturated, lower-performing channels and reinvesting them into high-performing areas.
Finance collaboration: Increase internal credibility by proactively identifying and cutting inefficient spending rather than only requesting budget for new initiatives.
Scalability realities: Recognize that doubling reach typically leads to a lower overall ROI as the most qualified leads are captured first.
