Are you losing money by ignoring marginal ROI?

How much revenue did you get from the last dollar you spent? If you don't know the answer, it's very likely you lost money on that last transaction. In a tough economy and an increasingly competitive SEM landscape it's essential to know how much you make (or lose) on each transaction. In short, incremental ROI not aggregate ROI is true measure of profitability.

The table above illustrates how aggregate values hide the metric that matters most – the profitability of each transaction. For a campaign with a target CPL of $20, if you spent $100 to get 5 leads your CPL is fine right? Probably not. What if the first 4 leads cost a total of $40 and the last cost $60? At $60 that last lead was probably far below your breakeven point.

In any search account, the first dollar spent is usually very profitable. The last one – much less so. The Efficient Frontier chart above illustrates the dramatic spike in marginal CPL that comes with diminishing returns. Aggregate CPL increases steadily belying the fact that the cost of incremental leads has ballooned dramatically. You need to see incremental return on spend to know whether you are at the right spend level.

Looking at more granular aggregate values like keyword level performance is not the solution. It just chases the problem into smaller buckets. You still won't know how much you got for the last dollar you spent on that keyword. To do this you need a reliable way to predict what will happen with incremental changes in spend at the keyword level. With every bid change on every keyword you are essentially buying more business. You need to know whether that change is worth it.

The beauty of performance marketing in the digital world is that with the right data and tools you can tune your marketing efforts this precisely. At Efficient Frontier we model the incremental cost and return for every keyword at every bid level. Our clients know exactly how much money they made on their last dollar spent. Predictive models allow them to not only spend precisely but to know the exact spend level that maximizes their profit.

Shay O'Reilly, Business Analyst