5 Economic Principles for Improving ROI on Meta and TikTok Advertising

Digital advertising has become one of the fastest-growing components of global marketing expenditure, driven by the increasing dominance of two-sided platforms such as Meta and TikTok. These platforms act as intermediaries between advertisers and consumers, monetising attention — a scarce resource in what economists call the attention economy.

However, while firms continue to increase ad spend at double-digit rates, many struggle to achieve meaningful improvements in return on investment (ROI). This disconnect arises not from a lack of reach, but from a misunderstanding of how value is created — and lost — within digital markets.

Applying core economic concepts such as diminishing marginal returns, demand elasticity, information economics, and behavioural biases can help advertisers allocate budgets more efficiently and improve performance.

Below are five economic principles that offer a clearer framework for achieving better ROI on Meta and TikTok.

1. Focus on High-Value Audiences: ROI Depends on Elasticity of Demand

A frequent error in digital advertising is treating reach as an indicator of effectiveness. From an economic perspective, it is a failure to recognize demand elasticity.

Certain consumer segments are price-inelastic with regard to engaging with certain content or brands. These consumers are high intent with demonstrated preferences — characteristics which increase the likelihood of conversion value and increase potential customer lifetime value.

In contrast, variable and ordinary or undifferentiated consumer segments are likely to be elastic, meaning the ability to engage with content is contingent upon factors such as message quality, time, or incentives.

The takeaway:

To improve ROI, it is important to achieve ad delivery to segments with low elasticity and strong revealed preferences, rather than simple maximization of impressions.

Advanced segmentation tools, behavioural targeting, and creative testing, particularly by using a top ad creative tool that finds important behavioural visual and text signals, are platforms that help brands identify and scale content delivery to low elastic segments.

2. Counteract Diminishing Marginal Returns Through Creative Refresh Cycles

In digital marketplaces, the satisfaction that consumers get from repeated exposure to the same advertisement rapidly declines. This is in line with the economic notion of diminishing marginal utility.

In spaces like TikTok and Meta, where there are fast content cycles and algorithmic ranking and reach are based on ongoing engagement, creative fatigue can diminish the performance of an advertisement within a period of a few days. As marginal utility diminishes, marginal returns to ad spend diminish.

The economic solution:

Try to run at a higher frequency of iterative creative testing to reset the marginal utility curve. Small changes to hooks, pacing, narrative framing, or editing will usually contribute to regaining engagement and delaying diminishing returns.

This reinforces the idea, too, that digital advertising is not a static investment, but a dynamic system that needs further optimisation on a continuous basis.

3. Balance Automation with Human Oversight to Reduce Information Asymmetry

While algorithmic optimization can be beneficial, it also skews the information asymmetry that exists between platforms and advertisers.

The platforms are optimizing based on their internal metrics (ie - watch time, probability to click, or likelihood to retain), which can be entirely misaligned with a firm's objective to maximize profit. This presents an economic version of the principal–agent problem: agents (i.e., the platform algorithms) are pursuing their own interests.

Overreliance on automated heuristics can lead to the following outcomes:

• misallocation of budget
• overspending on low-value clicks
• targeting segments of the population that are unlikely to convert
• focusing on metrics that have little economic value

The economic solution:

Strategies need to review and realign their ideal spending according to marginal ROI, especially in areas where certain placements or formats are favored.

4. Use Contextual Data to Correct Measurement Bias and Avoid Misallocation

Numerous organizations have an unclear or incorrect set of metrics that can be sub-optimal and inefficient, leading to what is traditionally referred to as misallocation of resources.

Metrics, such as impressions, reach, or click-through rates, can actually just be noisy signals and not indicators of economic value. By treating noise in these frames of reference as an information source, organizations are inadvertently skewing their judgments of consumer intent.

To make measurement less biased, organizations should consider using a set of multiple data sources:

• Sentiment analysis
• Qualitative customer feedback
• Post purchase attribution
• Cohort behaviour data
• Cost-of-acquisition in relation to customer lifetime value

Integrating this set should bring measurement closer to capturing economic value creation, not just a performance attribution economic indicator.

5. Integrate Creative and Analytical Teams to Increase Marginal Productivity

Creative teams and performance marketers are often siloed within many organizations, which, from a production economics perspective, reduces the marginal productivity of each labor team.

Inefficiencies prevail in the production function when creative teams don't have access to information about performance in real-time, and analysts are not involved in setting the creative direction.

Empirical research, including work done at McKinsey, also suggests that merged teams improve advertising efficiency, again by as much as 20%, just as economic theory clearly shows a higher return when complementary inputs of production are merged.

Having a rapid iterative feedback loop makes the next dollar of ad spend more productive.

Conclusion: ROI Improves When Firms Apply Economic Reasoning, Not Vanity Metrics

Many people misconstrue Meta and TikTok advertising issues as a matter of creativity or a platform’s algorithm. At the center, however, is the choice of allocation given the scarcity — as well as economics' most imperfect variable: allocation.

The brands that outperform succeed because they do not view (insert the name of the platform) digital advertising as an art or guessing game—they are viewing a systematic economy governed by:

• diminishing marginal returns
• information asymmetry
• behavioural responses
• consumer elasticity
• efficient allocation of capital

When a firm's strategy is based on these economic principles — and supported by execution, with analytic tools like a top ad creative tool — it can de-risk the overall media (insert the name of the platform) spend and finally understand it not as a guessing game of creative tests and ad spending regardless of results, but as a rationalized, proven, scalable source of economic value intended to support the defined strategy of the firm's overall corporate or brand goals.