What are diminishing returns?

Diminishing returns is the pattern every marketing channel follows. The first unit of spend reaches the people most likely to buy. Later units reach people who are harder to convince, or the same people again, so each extra unit earns a little less than the one before. Eventually the curve flattens and more money produces almost nothing more.

Rising cost per acquisition in paid search or paid social is often this pattern showing up in the platform numbers: the budget is being spent further along the curve.

A marketing mix model estimates a saturation curve per channel, which is diminishing returns drawn as a line: spend along the bottom, sales up the side, steep at first and flat later. The slope of that curve at today's spend is the marginal return, what the next unit earns. The average return is total sales from the channel divided by total spend, and it is always higher than the marginal return on a flattening curve, because it mixes the cheap early units with the expensive later ones.

Two mistakes come from ignoring diminishing returns. The first is scaling the best average performer: a channel with a strong average and a flat curve gives very little back for more money. The second is cutting a channel with a weak average that still has a steep curve, when it was the cheapest growth available.

The fix is to plan on the margin. Move spend from flat curves to steep ones until the marginal returns are roughly level, which typically gives 5 to 15% more effect from the same budget, and set the total where the last unit still clears the return the business requires. Both are what scenario planning in Odins is built to do.

• Saturation curve: The response curve per channel: how sales respond to spend, and where the next unit stops paying.
• Marginal ROAS: What the next unit of spend in a channel earns at today's level. The number a budget change actually asks for.
• ROAS: Return on ad spend: revenue per unit of spend. Useful, as long as you know which ROAS you are looking at.
• Budget optimization: Finding the split and the total where the next unit works hardest, under the constraints the business has.

Go one level deeper: Allocate budget across channels. Set the right marketing budget. Or go back to all terms in the glossary.