Why Is Marginal Decision Making So Impactful?
In economics, marginal thinking requires decision-makers to evaluate whether the benefit of one more unit of something is greater than its additional (i.e.., marginal) cost.
In the OutPoint case, we evaluate whether the expected return from an additional dollar of ad spend is greater than its cost.
Marginal benefit vs. cost can be quite challenging to model in complex systems (like an ever-changing marketing mix with dynamic consumer behaviour!). Gaining an intuitive understanding of how to analyze decisions "at the margin" is essential to becoming a good decision-maker (and resource allocator).
We all make marginal benefit vs. cost decisions *every* day. For example, we weigh whether the marginal benefit of having one more cup of coffee in the afternoon exceeds the marginal costs from more caffeine consumption. ☕
Once marginal thinking "clicks", you start to see it everywhere.
OutPoint Insights 💡
Average vs. Break Even CAC
We've seen that if a brand's average CAC is approaching its break-even CAC target (based on an LTV/contribution margin threshold), the brand is likely overspending in that final ~15-30% of spend approaching the target. The marginal ad spend is inefficient and we should re-allocate it to higher returning areas .
A marginal CAC curve lets you visualize how spend/CAC changes over time and is useful for pinpointing points of diminishing return.
Dial Up or Dial Down
Finally, marginal CAC can have radically different curvature based on product-channel fit and external/internal dynamics: (i.e., is marginal CAC increasing, decreasing, or flat)
What Should You Take Away?
Increasing Marginal CAC 📈
Your likely in diminishing returns, you may need to cut ad spend if Marginal CAC is approaching or exceeding break-even CAC
Decreasing Marginal CAC📉
Positive returns! You actually get more incremental return out of each dollar invested --> DIAL UP SPEND!
Flat Marginal CAC👍
You're seeing neutral returns. You are safe to continue scaling spend if your marginal CAC is below your break-even
Want To Learn More?
OutPoint is a suite of data science tools used by high-growth B2C marketers to allocate paid media budgets optimized for incremental lift and improved marginal returns.
🚀Sign up here, or email firstname.lastname@example.org if you are interested in learning more.