Diminishing returns in marketing happen because a channel runs out of its best prospects, bending a constant ratio into a curve. This matters because marketers control that curve two ways: spend level, and how spend converts through targeting and creative. Without testing which lever moved, marketers can’t tell if a dip came from spending too deep or weak strategy. This video explains how experimentation separates spend effects from strategy effects.
Why Diminishing Returns in Marketing Follow a Curve, Not a Fixed Ratio
Diminishing returns in marketing follow a curve, not a fixed ratio, because no channel can scale infinitely at the same rate of return, and the deeper spend goes, the fewer high-quality prospects are left to convert. In this video, John Wallace, CEO of LiftLab, explains that a channel’s return is really just a ratio of revenue to spend, and if it stayed constant, media planning would be easy. It doesn’t, because the relationship bends into a curve as more money goes in.
Marketers have exactly two levers to move that curve. The first is spend itself: pull back and returns improve because the audience left is higher quality; push deeper and returns fall as the best prospects run out. The second lever is the underlying strategy, revisiting targeting, refreshing creative, or switching bid types and campaign types, which can make the same spend generate more revenue. Since many platforms now run opaque, algorithm-driven campaign types, understanding the underlying shape of the spend-to-revenue relationship still matters even when the mechanics inside the platform are a black box. The most reliable way to tell which lever actually moved the needle, spend or strategy, is to test it directly through experimentation.
In this video, you’ll learn:
Why marketing channel returns are non-linear curves rather than simple, constant ratios
How increasing your advertising spend can impact the efficiency of your returns
Practical methods for improving performance without changing your total budget
The importance of using experimentation to validate your marketing strategy
How to manage and interpret the economics of platforms using algorithmic bidding
TIME STAMPFull Video Transcript: Diminishing Returns in Marketing Explained
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LiftLab’s CEO John Wallace breaks down the two levers marketers control when it comes to diminishing returns: how much to spend, and how well that spend converts.
[0:00 – 0:46] Defining Marketing Channel Returns
What’s the return on a specific marketing channel? First, let’s ask ourselves, what is a return? It’s really a ratio. It’s saying, as I put money into the system, let’s spend, what do I get back out of the system in terms of money, which is revenue? It would be great if that were a simple ratio that were constant over time. If we could always put in a dollar and get $3 back, our life would be so much easier. But that would imply marketing channels that could scale infinitely, that we could continue to pour money in and get the same return. And that’s just not true in the real world. That ratio and that relationship ends up being something that is not linear, so we represent that with a curve. It’s saying, on the x-axis, as I spend, how much money do I get back? There are two ways to help influence that particular ratio; it’s actually all within the marketer’s control.
[0:46 – 1:08] Strategy 1: Adjusting Spend
The first thing that a marketer can do is change the amount that they spend. By definition, if you continue to spend deeper and deeper into a channel, you’re going to run out of the best prospects. And that means that your returns will come down. So if you want the returns to come down, spend more money. If you want the returns to come up, you can spend less money; you’ll be more efficient, and that is the economic trade-off of whatever strategy that you have deployed.
[1:09 – 2:26] Strategy 2: Optimizing the Ratio
The other thing that marketers have in their control is to change the ratio to make the returns more attractive economically. That means literally, for the same amount of spend, I’m going to make more money. And what are the ways that we do that? We do that by potentially revisiting the targeting that we’re using, we may do that by changing the creative strategy that we’re following or the refresh cycle of that creative, or we may move to a different bid type in the platform, or from one campaign type to another campaign type. A lot of these ad platforms are moving the campaign types to what most of the industry refers to as black box algorithms. You still need to know what’s the shape of the economics, the relationship, or as I put a dollar, pound, euro in, what am I getting out in return for that? And so those are the two that I think of most commonly: you have control over the returns, and you dictate the returns by deciding how much to spend, and you have control over what strategy you have on the field. Sometimes I love to see this, when the economics aren’t as favorable as we thought, it does lead us to do some soul searching and maybe revisit some of the strategy that was in place. And the most common way to revisit that strategy is to do it under the lens of an experiment, so that you have more confidence in the economics of the play that you’re running.
Key Lessons: Managing Diminishing Returns With Spend and Strategy Levers
Economic trade-offs: Adjusting spend levels is a direct way to manage return efficiency, as spending deeper into a channel eventually exhausts your best prospects.
Strategic optimization: Enhancing returns for a set budget involves refining your targeting, refreshing creative assets, and testing different campaign or bidding types.
The power of experimentation: Conducting controlled experiments is the most reliable approach for verifying your economic assumptions and building confidence in your marketing plays.
Algorithmic reality: Even when using complex, opaque ad platform algorithms, understanding the fundamental shape of your spend-to-revenue curve remains essential for long-term success.
