Marginal Cost and Marginal Benefit in Digital Advertising: How Ad Format Choices Reflect Core Economic Principles

In the world of digital ads, companies always have to find the right balance between marginal cost and marginal benefit, which is something you learn in basic economics classes. This idea says that smart decision makers will keep putting money into something as long as the extra benefit they get from one more thing is more than the extra cost of that thing. When we talk about different types of online ads, this idea helps us understand why advertisers pick certain ones that match what they want to achieve, how much money they have, and what they expect to gain.

There are many different types of ads, that all have different production costs and how well they work. An ad format examples includes taking over an entire homepage can be expensive, while simple banner ads might cost only $5–$10 for every thousand views. However, those cheap banner ads usually don't get people very involved, and their typical click rate, or CTR, is less than 0.1%. On the other hand, a really amazing video ad or a campaign with social media influencers can cost thousands of dollars to make, but they might get people more interested, target the right people better, and have stronger positive effects, such as people becoming more loyal to the brand and actually buying the product.

The tradeoff between what you are spending and what you are receiving becomes obvious when trying to weigh which part of the marketing funnel you want to target with a marketing goal. If companies are trying to reach a top of funnel marketing goal that builds maximum brand awareness, a display campaign that exposes the brand to the world at a low cost might make sense in that instance… The cost is low, and even though each individual benefit of the views is small, the overall reach across many views balances the investment.

However, when the aim is to get people to buy the product or show that they want to buy it, which is further down the funnel, the extra benefit of ads that are highly targeted and get people involved often makes the higher extra cost worth it. For example, working with influencers on platforms like Instagram or TikTok can cost more than $100 for every thousand views, but data from Influencer Marketing Hub says that companies earn about $5.78 in media value for every $1 they spend on influencer campaigns. That's an awesome return, especially when trying to get the attention of niche audiences that have really strong interest.

Nike, for instance, always balances expensive video ads with cheaper display campaigns. The video ads, which are high cost, as they are often cinematic and try to connect with people's feelings, but designed for equally high marginal benefits, like emotional impact, viral sharing, and brand building, are often connected to new product releases or big happenings like the Olympics. Display ads are used to get people who have looked at products to remain interested in the brand. These come with lower costs, but also lower benefits.

Another example from the real world is direct to consumer brands like Glossier or Warby Parker. To begin with, these companies use low-cost ad types like social media banners or Google Search ads to see how customers react. Once they learn more about their audience and make their sales process better, they start spending more on more expensive ad formats that grab consumer attention, such as YouTube videos or relationships with micro-influencers. It means they are using a tactic which falls in line with the “spend money as much as possible until the marginal cost is equal to the marginal benefit"; and that is a rule for rational spending.

Also, it is worth being aware that when considering cost, the marginal cost of making the ads themselves can change a lot. A static banner could be done by a designer within an hour; Whereas a campaign led by an influencer may involve negotiations, edits, and weeks of lead time. Yet if the benefit for each extra dollar spent is higher, because of stronger brand recognition or higher return, advertisers are justified in taking a more expensive route.

Basically, understanding how companies decide which ad types to use by considering marginal cost and benefit aids not only what advertisers choose, but also why they do business in that manner. As business competition increases and gaining people to be interested becomes more difficult, how businesses act needs more smart economic thinking. The idea that "you spend only up to the point where the marginal benefit equals the marginal cost" is still very important in a TikTok-driven ad world, and also in the classical models of supply and demand economic concepts.