ROAS, iROAS, miROAS: Choosing the Right KPI for Optimizing Media Spend

In the 2010s, ROAS was the north star metric that digital marketers used to optimize the $680B of annual global digital advertising spend. In the 2020s, Incremental ROAS, or iROAS, emerged as a challenger: It promised to help marketers optimize based on incrementality.

What if I told you that even iROAS is the wrong metric for making re-allocation decisions across channels, campaigns, and ad sets? 

In this blog, we'll discuss how ROAS, iROAS, and miROAS should be used in measurement and digital spend allocation. We’ll break down what each of these KPIs really means, where they shine, and how to choose the right one for different use-cases.

Return on Advertising Spend (ROAS)

What is Return on Advertising Spend (ROAS)?

ROAS (Return on Ad Spend) measures the return of media spend based on attributed revenue. Revenue can be attributed to the specific channel, campaign or ad set using various methods, and thus it's critical to understand what is the specific underlying attribution method.

When someone is using "ROAS", the person is typically referring to ROAS based on one of the following methods:

1. Ad Platforms' own attribution: Each Advertising Platform has its own attribution methods that can be customized by the advertiser. As an example, with a "7-day click"-rule, the platform claims all conversions where a buyer clicked the ad within 7 days prior to purchase. Multiple ad platforms can claim the same conversion.
2. Last-Click attribution: Last-Click attribution gives all credit to the ad that is last clicked before the user purchase. In Last-Click attribution, each recorded conversion is only assigned to one channel or campaign.
   

What are the Limitations of ROAS?

⚠️ ROAS does not measure incremental revenue driven by media. All attribution methods are rule-based and deterministic, which makes it impossible for them to distinguish between

• Conversions that would have occurred without media
• Conversions that were driven by a specific channel, campaign or ad set
• Conversions that were actually driven by other channels

Rule-based attribution methods always have biases that vary depending on the method. As an example, ROAS based on ad platform attribution is typically inflated. As another example, last-click attribution favors channels that are close to conversion, such as Branded Search, whereas channels that are earlier in the buying journey, such as Paid Social, are heavily undervalued. 

In addition to being biased, ROAS often misses a large amount of sales data. For Omninchannel retailers, none of the ROAS methods include physical store sales. Additionally, Google Analytics 4 Last-Click often lacks 20-50% of eCommerce revenue due to the privacy changes that have made tracking more challenging in the previous years.

⚠️ ROAS does not measure marginal returns. ROAS is always backwards looking, summarizing average return for a specific timeframe. ROAS can't answer the question: If I invest one additional dollar to a campaign, how much revenue will the additional dollar drive?

How to Use ROAS in Measurement and Optimization?

❌ Don't use ROAS for measuring performance. All rule-based attribution methods fail at measuring the true incremental return of advertising.

❌ Don't use ROAS for spend re-allocation decisions. ROAS doesn't measure marginal returns, and thus can't answer optimization questions, such as "If I spend one more dollar, how much additional revenue will I drive?"

✅ Provide conversion data to your measurement vendor as an additional data stream that contains information about media effectiveness. If you're working with an advanced measurement vendor, they can leverage the data. 

Incremental ROAS (iROAS)

What is Incremental ROAS (iROAS)?

Incremental ROAS (iROAS) is an estimate for the true incremental return that a specific channel, campaign, or ad set has generated.

iROAS for a specific marketing activity excludes revenue that would have occurred without advertising, as well as revenue driven by other activities.

What are the limitations of iROAS?

⚠️ Measuring iROAS requires new tools. Measuring iROAS on a continuous basis requires implementing a Marketing Mix Model. One-off experiments, such as Geo Lift tests and Conversion Lift Tests, can also provide snapshots to iROAS.

⚠️ iROAS does not measure marginal returns. iROAS provides you the average historical return for a channel, campaign or ad set, but it does not tell you if it's a good idea to invest more. You could have high iROAS, but if you have already saturated the channel or campaign it can be a costly mistake to invest more.

How to Use iROAS in Measurement and Optimization?

✅ Use iROAS as your primary KPI for measuring past performance. iROAS is the best estimate for the actual effectiveness of channels, campaigns, and ad sets.

❌ Don't use iROAS for spend re-allocation decisions. iROAS measures average historical return for a given time period, but it does not measure marginal returns. iROAS can't answer the question: If I increase or decrease spend, how will the revenue driven by the marketing activity change.

Marginal Incremental ROAS (miROAS)

What is Marginal Incremental ROAS (miROAS)?

Marginal Incremental ROAS (miROAS) provides the return for the next invested dollar for a channel, campaign or ad set. In other words, it answers the question: If an additional dollar is spent on the channel, how much additional revenue will it generate?

miROAS is always dependent on the current spend level for the specific marketing activity:

👉  When your spend level is low, you typically have lots of room to scale and miROAS can be high. High miROAS means that the next additional dollar drives a high amount of additional revenue. 

👉 When your spend on an activity grows, you will reach a point where the channel starts to saturate and miROAS starts to decrease. Low miROAS means that the next additional dollar drives little additional revenue.

In connection to marginal returns, you might also see terms such as Marginal ROI (mROI) or Marginal ROAS (mROAS). Be careful around them: they could be used as synonyms for miROAS, but the lack of "i" could also indicate that they are not based on incrementality, in which case you should avoid them.

How is miROAS calculated?

miROAS is one of the outputs of Marketing Mix Modeling. Mathematically, miROAS is a derivative of the response curve of a channel, campaign or ad set, as illustrated in the picture below. In this response curve, miROAS is high at low spend levels, but decreases as spend level grows. 

How to Use miROAS in Media Measurement and Optimization?

✅ Use miROAS as your primary optimization KPI. Spend more where miROAS is high, and decrease spend where miROAS is low.

To get most out of your marketing spend, miROAS should be analysed on the level where bidding decisions are made, such as ad set -level in Meta. As an example, if you're optimizing Meta spend, you should review the miROAS of all your ad sets and allocate more spend to ad sets with high miROAS.

Summary & Conclusions

✅ Use iROAS as your primary KPI for measuring past media performance. Track iROAS over time to understand whether your spend optimization decisions are increasing your media effectiveness (if that's your goal).

✅ Use miROAS as your primary KPI for optimizing spend allocation across channels, campaigns, and ad sets. Re-allocate spend to campaigns and ad sets with high miROAS from campaigns and ad sets with low miROAS.

👉 For automated bidding recommendations based on miROAS, use a tool like Sellforte Performance. If you’d like to see Performance in action or learn how it can fit into your daily workflow, book a demo today. 

Authors

Lauri Potka is the Chief Operating Officer at Sellforte, with over 15 years of experience in Marketing Mix Modeling, marketing measurement, and media spend optimization. Before joining Sellforte, he worked as a management consultant at the Boston Consulting Group, advising some of the world’s largest advertisers on data-driven marketing optimization. Follow Lauri in LinkedIn, where he is one of the leading voices in MMM and marketing measurement.