If only life was linear. We’d be able to reliably predict outcomes like it was our job. But that would also make life kinda boring. Media investments in digital marketing are similarly non-linear. And yes – that keeps it interesting.
So what is a point of diminishing return? It’s a concept in economics that essentially explains the phenomenon when an incremental unit of input fails to yield the same output on a per-unit basis. In other words if you invested $1 and got $5 back, you’d expect that if you invested $100, you’d get $500 back – if things were perfectly linear. But let’s say you only get $300 back, that means the relationship is not linear and you’re going to reach a point of diminishing return – where at some point, you’d invest another $1 and only get $1 in return.
We can observe this economic phenomenon vividly in our marketing investments – and its critical to understand it so you know when it’s occurring. Strategically this helps us determine at what point to continue to invest in a particular marketing channel or tactic, and at what point to explore other options. Graphically, it looks something like this.
The point at which the curve begins to flatten along the y-axis is the point of diminishing return – meaning more input (x) stops yielding more output (y). Applying this concept to a marketing channel, we’d expect to be able to continue investing in something like paid search and drive more and more revenue. But at some point we’re going to reach a ceiling where we can’t continue push incremental investment into this channel and drive the same incremental revenue – holding everything else constant.
A telltale sign that you’ve reached the point of diminishing return is increasing CPAs. This makes sense as you’re investing more and failing to drive the same level of return, which would result in higher cost per acquisition metrics.
Know the signs and take action when you reach the point of diminishing return with a marketing program!