Why average ROAS says nothing about the next R$ 1 you will invest

ROAS (return on ad spend) shows how much came back, on average, for each R$ 1 already invested, and because it is an average it does not tell you how much will come back from the next R$ 1. The decision to increase budget depends on that next R$ 1, and it usually returns less. Each channel tends to saturate: the people most likely to buy have already been reached, and new money starts competing for people who are less interested.

This weighs even more at a time when paid media is losing efficiency and every budget request needs an argument that holds up in the meeting. Below are the difference between the two readings, the signs of saturation, and a way to ask for the next budget with less risk.

Average ROAS and the return on the next R$ 1: what is the difference

Average ROAS divides all attributed revenue by the total invested, while marginal return looks only at what the last slice of budget brought in. Both numbers come from the same campaign and can point to opposite decisions.

Imagine, in a hypothetical example, a channel that received R$ 50 thousand in the month and generated R$ 250 thousand in attributed sales. ROAS is 5. The following month, the budget goes up to R$ 70 thousand and sales go to R$ 290 thousand, and ROAS drops to a little over 4, which still looks great.

But the extra R$ 20 thousand brought R$ 40 thousand in sales, a marginal return of 2. If the product margin is 30%, the minimum return to break even is 1 divided by the margin, about 3.3. In other words, the budget increase lost money, even with the month's ROAS above 4.

Meridian, Google's open-source marketing mix model, separates these two readings in its documentation on ROI, marginal ROI, and response curves. It defines marginal ROI as the incremental outcome of the next dollar invested above the historical budget level. And it warns that, when this return is far below average ROI, the channel is already starting to saturate.

Signs that the channel is saturating

Saturation usually shows up in the platform's numbers before it shows up in average ROAS. Three signs deserve attention whenever the budget goes up:

• CPA rising along with the budget: the cost per acquisition (CPA) increases with every budget increase, even with no change in the creative, the offer, or the targeting.
• High frequency: the same person sees the ad many times in a few days, and clicks and conversions do not keep up.
• Repeated audience: the reach of new people grows less than the budget, and most conversions come from people who already knew the brand.

One caution before concluding that the channel has saturated: in a long-cycle sale, CPA rises right after a budget increase because the sales from that investment have not yet closed. The article on CAC in complex sales shows how to look by cohort to separate cycle lag from real saturation. It is also worth separating the effect of budget from the effect of optimization before touching the campaign.

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Why the channel with the best ROAS may be the worst place for more budget

A high ROAS can be the picture of a channel that has already captured almost all the available demand. Brand search campaigns and remarketing can show high ROAS precisely because they speak to people who were already close to buying. The extra budget does not create more people searching for the brand. The average hides this limit the same way the average ticket hides the distribution of customers.

Think, in a hypothetical scenario, of two channels: A has a ROAS of 9 and a small audience, almost entirely reached already, and B has a ROAS of 4 and a large audience that has seen few ads. By the average, the increase would go to A. By the return on the next R$ 1, B may be the best choice, because A has little room to grow.

Meridian's documentation goes in the same direction: the channels with the highest marginal return are identified as the best ones to receive additional budget. Scaling campaigns by average ROAS ranking tends to concentrate money where it returns the least.

How to ask for the next budget by investment tier

Ask for the next increase in investment tiers, with the expected return of each one. Projecting average ROAS onto the entire budget hides the drop in return, and the channel's own history already allows you to build the calculation:

1. Separate the channel's months by budget tier, for example up to R$ 30 thousand, from R$ 30 thousand to R$ 50 thousand, and above R$ 50 thousand (hypothetical values).
2. Calculate the return of each additional tier: the additional revenue divided by the additional budget between one tier and the next.
3. Compare each result with the minimum return to break even, which is 1 divided by the margin.
4. Propose the increase in steps, with a deadline and a stopping criterion. If the next tier does not deliver the agreed return, the budget goes back to the previous level.

With this, the conversation with leadership swaps the promise of maintaining ROAS for a measured bet, with a defined loss limit. It is the same logic as distributing the marketing budget by channel based on data, applied to the size of each increase. The question the decision maker should take to the next meeting is simple: how much did the last tier of budget bring in, and how much does the next one need to bring to be worth it?

Frequently asked questions

What is ROAS and how do you calculate it?

ROAS is the revenue attributed to campaigns divided by the media investment in the same period. A ROAS of 4 means R$ 4 in sales for every R$ 1 invested.

What is marginal return in paid media?

It is the return of the last slice of budget: the additional revenue divided by the additional investment. It answers how much the next R$ 1 should bring in, and that is why it decides the budget increase.

Why does ROAS drop when the budget increases?

Because of diminishing returns in paid media. As the budget grows, the channel has already reached the people most likely to buy and starts paying for less interested audiences or for people who have already seen the ad.

What is a good ROAS?

It depends on the margin. The minimum to break even is 1 divided by the contribution margin: with a 25% margin, ROAS needs to exceed 4 for the media to be profitable.

To get the formula and a calculation example for ROAS, CAC, and the other funnel indicators, download the Laiki Metrics Guide.