Deciding whether or not you should increase your advertising budget doesn’t seem too difficult. Is your ad campaign driving results? If yes, increase budget. Simple.
But you’re asking the wrong question. You should be asking whether your ad campaign is driving more results than usual. Knowing this will help you understand whether your campaign is increasing your baseline revenue.
So how do you get the answer to this question?
Incremental revenue measures the contribution of your marketing effort to increasing overall revenue. Rather than just showing how much revenue your ad campaign generated, incremental revenue shows how much more revenue your campaign generated. This will give you your true ROAS (Return on Ad Spend) and help you understand whether you should increase your budget. With a little data modelling you’ll also be able to predict at what point your increases in budget will stop delivering incremental revenue.
In this blog, we’ll show you how to calculate incremental revenue and how you can use this information to measure and forecast your ad spend.
Incremental Revenue Formula
Incremental Revenue = Total Revenue — Baseline Revenue
To calculate incremental revenue you need to know two things—the revenue generated from your campaign and your baseline revenue.
Baseline revenue refers to your expected revenue during the given time period of your campaign, if you hadn’t run your marketing campaign.
Incremental Revenue Example
An ecommerce store typically sells $20,000 worth of trainers per month without running any advertising campaigns. Throughout September the store spends $5,000 on a Facebook campaign and sells $32,000 worth of trainers in total.
Incremental revenue = $32,000 — $20,000
Incremental revenue = $12,000
You can then work out return on ad spend of your incremental revenue by using the following formula:
Return On Ad Spend % = ( Incremental Revenue / Ad Spend ) x 100
In the ecommerce store example above, this would be calculated as follows:
Return on ad spend % = ( 12000 / 5000 ) x 100
Return on ad spend % = 2.4 x 100
Return on ad spend = 240%
How To Use Incremental Revenue
Once you understand how incremental revenue works, there are a number of scenarios where you can use it.
Measuring Past Campaign Performance
The simplest way to use incremental revenue is to measure past campaign performance. This helps you answer the question: did my ad campaign measurably impact new sales revenue?
Measuring incremental revenue of past campaigns can then help you decide whether you should launch new campaigns.
Measuring Retargeting Performance In Real-Time
While measuring the performance of past campaigns is great, it makes sense to measure the performance of your current campaigns while they’re happening.
A typical method for doing this is to segment your target audience into two groups. One group will be exposed to your advertisement during your campaign period, while one will not. You can then measure the revenue of the group exposed to ads vs the revenue generated by your control group to get your incremental revenue increase.
This method typically works well for retargeting campaigns, in which both groups initially view your content but only one is retargeted with a subsequent advert.
Forecasting Campaign Performance
Based upon your previous campaign performance and your current baseline revenue, you can forecast your upcoming campaign’s incremental revenue. By estimating the total revenue you expect to make, you can apply this to the formula detailed above to give you your incremental revenue.
This can then be used, as above, to estimate the return on ad spend of your incremental revenue. Doing these calculations before you launch a campaign will help you understand if it is likely to drive real value for your business.
So why go to the effort of calculating incremental revenue? In short, because it provides stronger proof of return on investment and enables you to focus your spend on the campaigns that are making a real difference to your bottom line.
Furthermore, if you’re genuinely producing positive incremental ROAS, then your marketing budget shouldn’t be capped. If you can prove you’re driving incremental revenue higher than the cost of your advertising, why stop?