Diminishing returns (DR) is a universal law that explains why efficiency improvement slows as marketing spending increases.
Let's consider a firm that allocates 325 million, resulting in an ROI of $32 for every dollar spent.
At this level, they're delivering +16 ppt incremental value over the baseline—$275 m revenue, in this case.
If nothing else is changed (launch a new product, increased competitor pressure), how much additional marketing spend is needed to deliver the same incremental value?
In this case, to achieve an additional +16 ppt incremental value, we need to spend 3.7!
Consequences
The cause of media saturation is overspending in media, which is due to DL at the channel level. Achieving higher sales targets by merely increasing ad spend becomes exponentially harder.
Digital channels offer advanced options like targeting and personalization, but the DL applies to them just like traditional marketing channels.
Final words
The concept of "diminishing returns" was discovered in the early days of the industrial age. In the 18th century, economists studied and tried to optimize the efficiency of production processes.
"Each increase [in an input] would be less and less productive," 18th-century economists argued.
Diminishing returns is a universal phenomenon that applies to every type of investment. Including marketing spending, which is a form of investment across online and offline channels.
