Test your marketing smarts with this one-question quiz:
The brand’s Finance team has just approved an additional $10,000 to spend on an ongoing campaign. Last month – the month of the campaign’s launch – the brand saw a very high 7:1 ROI on TikTok, making it far and away the highest-return channel in the campaign’s media mix. A smart move that the marketing team can make is to invest a sizeable chunk of that $10,000 back into TikTok.
- True
- False
- It Depends.
If you chose option 3 – “It Depends” — you’d be right. And much of what the answer depends on is diminishing returns.
An Economics Refresh: Why Diminishing Returns Matters to Marketers
You likely remember the diminishing returns concept from college-level economics. In a nutshell, the law of diminishing returns tells us that even if an investment or activity drives certain results once, the level of return on investment is likely to decrease over time. Hiring one, two, or three additional workers to a small team might pick up slack on workload and increase team productivity dramatically; a fourth or fifth employee might create bloat that drives overall productivity down. Adding one extra item to a dessert menu might entice new customers, adding many might only overwhelm them. Good things are best in moderation.
The principle applies to marketing as well. Just because a specific channel or initiative was highly effective once, we can’t assume say it will be equally effective every time. Consider three of many possible examples of diminishing returns that marketers face every day:
- Channel Investment: Only so many relevant customers tuned in to a given marketing channel. Once you’ve reached all your best customers in that channel — for instance, all the TikTok users who closely match your ideal customer profile – every additional marketing dollar or euro will go toward a customer who’s just a little off-target from your ideal. Beyond that initial investment, every additional sum spent may yield a lower ROI.
- Retargeting: You’ve probably experienced this as a consumer. The first time you get an ad to buy those shoes you checked out online, you might be appreciative of the reminder and go back to the brand’s website and make the purchase. Or you may need a few extra ads to finally convince you to buy. Or, of course, there’s a chance you initially decided the product wasn’t for you, and no amount of additional “reminders” will change your mind. Now imagine that dynamic from the brand’s perspective. The first round of retargeting may be a high-ROI investment—a useful nudge that drives a customer to buy. But for every subsequent round of retargeting means that retargeted ads needed to “work harder” to drive a conversion, more investment needs to be placed to drive each subsequent conversion, and the ROI on retargeting goes down as the retargeting campaign drags on.
- Hot New Outlets: As we’ve pointed out before, a hot new outlet can fizzle (or at least plateau) – both in terms of engagement and user growth— as fast as it ramps up. When that downturn happens, your marketing dollars or euros will likely work less effectively than they worked the first go-round. All things being equal, it’s likely easier to see ad performance growth in a platform that’s high-growth and buzzy versus an outlet that’s on the wane and losing its luster.
One Outlet Closes, a New One Opens
Our advisor Professor Koen Pauwels uses the “hot new outlets” example above for a powerful suggestion as to how marketers can turn diminishing returns to their advantage. In Professor Pauwels’ experience with brands, Finance teams often have a difficult time approving spend in emerging marketing channels, because Marketing is equally reluctant to cut spend in existing ones. But marketers who keep an eye on diminishing returns can have a far better sense of when spend in another outlet has run its course. With that knowledge in mind, they can confidently shed yesterday’s poor-performing outlet in favor of today’s hotter ones.
To apply this approach more deliberately, we at LiftLab advocate two approaches when it comes to diminishing returns:
- Do a reverse Robin Hood. Find the outlets that, based on models and experiments, are running their course as the most optimal value-drivers, and redirect spend from those waning outlets elsewhere. It’s an approach we at LiftLab jokingly refer to as “steal from the poor, give to the rich.”
- Analyze actual changes – not average ones. Many marketing measurement approaches look at overall shifts in ROI over longer periods of time, like months or quarters. This approach inevitably creates an average view of all the ways marketing ROI rises and falls over time. The problem is that the average approach will inevitably miss the point when marketing hits the point of diminishing returns and ROI starts to go down. These average approaches prove especially problematic when – as is often the case — average returns are higher than the initial investment, even though ROI is on the wane. Looking at an average line graph will show an upward trend; only by zooming at increments do you see that – and when – ROI stops rising or starts falling. To avoid overlooking these critical turning points and to fully understand diminishing returns, marketers approach should go much deeper than average. Instead, they should zoom in on the changes in ROI as they happen – so they can make decisions that pass the test.
For a deeper dive into diminishing returns, why it matters, and how it fits into marketing models at LiftLab and elsewhere, check out our eBook: Beyond Incrementality.
