Role of the Law of Diminishing Returns in Allocating Marketing Budgets

Have you ever wondered why some times the performance of a campaign deteriorates once you start pumping more money into it? For example you increased the budget of a PPC campaign by say 80% (all other things being constant) because it is performing so well but instead of getting better results; you start seeing a decline in conversion rate and increase in cost per acquisition.

I have been in this situation several times.  I saw a campaign performing very well, got excited  and increased it budget by 80 to 100% the next month and then ………………..BAM…… conversion rate down, cost per acquisition up and panic and fear. Recently one of my clients had similar excitement. He saw Facebook campaigns performing so well for the last 2 or 3 months, he got excited and asked me to double the ad spend on facebook. Being burned several times in the past by investing too much at once in the wrong way, I knew this is not going to work.  So I did what marketers usually do. Convinced him that it is not a good idea and we need to go slow.

This blog post is simply an extension of that convincing. Because I want you to think before you over invest in any marketing channel just because it is performing so well. Although the reason of high performance seems so justifiable to invest more, things are not that black and white in a multi channel online environment and overlooking important factors can result in a massive loss in revenue esp. if you are investing tens of thousands of pounds.

Before you invest more money in any marketing channel I request you to look at the following two factors:

1. The law of diminishing returns.

2. Role of assisting marketing channels.

The law of diminishing returns

According to the law of diminishing returns, if you keep adding more of one unit of production to a productive process while keeping all others units constant, you will at some point produce lower per unit returns.  So for example if you keep pumping more money into a facebook campaign without changing the present form of the campaign, at some point you will reach the point of diminishing returns and once you cross this point, your conversion rate will go down and cost per acquisition will go up.  So when you are thinking of increasing the budget of a campaign by considerable amount, think of putting more ads and targeting more keywords. In this way you will change multiple units of production and can stay away from the point of diminishing returns.

To determine the point of diminishing returns you need to gradually add more of one unit of production in the production process. If you rapidly add units, you will never know when you crossed the point of diminishing returns and start losing money. That is why I suggested my client to go slow while increasing the budget of the facebook campaigns.

Role of assisting marketing channels

Up to now you are investing in Facebook campaigns with the belief that it is generating lot of revenue and has high conversion rate. But before you over invest in Facebook campaigns, wait for me. I am not done yet.

Do you really think Facebook campaigns are generating all those revenues and conversions in this world of inbound marketing where every marketing channel is assisting conversions in some way? Are you sure there is no other marketing channel which is helping in driving Facebook conversions? If you are not, then look at the role played by assisting marketing channels before you take big decisions and double/triple the budget of a very successful campaign in a hope to multiply its performance.

Because if you don’t, you may reach the point of diminishing returns as you are adding more units of production (here budget) to one marketing channels while keeping other units constants (i.e. not investing proportional amount in assisting marketing channels). This theory holds true for any campaign and not just facebook.

Takeaways:

1. Understand that just doubling the budget of a high performing campaign may not result in proportional increase in performance.  You need to do a lot more than just increasing the budget then. Consider running more ads, targeting more keywords or new markets to stay away from the point of diminishing returns.

2. Go slow with your investment in any marketing campaign/channel.  If you rapidly invest huge amount of money, you will never know when you crossed the point of diminishing returns and start losing money.

3. Understand that no one campaign is solely responsible for conversions and sales if you are doing inbound marketing or are involved in multi channel marketing.

4. Understand that over investing in any marketing channel while overlooking the assisting marketing channels may take you to the point of diminishing returns faster than you think.

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