What are Diminishing Returns in Advertising?
Diminishing returns is the economic principle that as you increase ad spend, each additional dollar generates less incremental value than the previous one. This happens because:
- You reach your most valuable audiences first
- Ad platforms show your ads to less relevant users as you scale
- Competition increases as you bid on more inventory
- Market saturation limits how many people need your product
How Diminishing Returns Affect Your Campaigns
Example: Scaling a Campaign
| Budget | Conversions | CPA | Marginal CPA |
|---|---|---|---|
| $10,000 | 100 | $100 | $100 |
| $20,000 | 180 | $111 | $125 |
| $30,000 | 240 | $125 | $167 |
| $40,000 | 280 | $143 | $250 |
Why Model Diminishing Returns?
- Budget Optimization: Find the point where scaling is no longer profitable
- Realistic Forecasting: Don't assume linear growth when planning budgets
- Portfolio Allocation: Know when to shift budget to other channels
- Expectation Setting: Give stakeholders realistic projections
Factors That Affect Diminishing Returns
- Audience Size: Smaller audiences saturate faster
- Competition: Competitive markets have steeper curves
- Campaign Objective: Conversion campaigns show more diminishing returns than awareness
- Creative Quality: Great creative can extend efficient scaling
- Product Market Fit: Strong PMF allows more efficient scaling
Free vs Paid Scaling Analysis Tools
Many sophisticated marketing platforms include diminishing returns modeling but charge premium prices:
- Marketing Mix Modeling (MMM) tools: $5,000+ per month
- Media planning platforms: $500-2,000 per month
- Advanced analytics tools: $200-500 per month
MarTech Tools provides practical diminishing returns modeling completely free - no signup required, no data limits, and 100% private (all calculations happen in your browser).