What are diminishing returns on investment (or diminishing returns on ad spend)

May 10, 2022

Any investment reaches a point where further investment generates less return (meaning the reward, most often dollars). This is called diminishing return on investment in economics. And marketing is subject to the same forces. 

Any marketing activity is done at some cost (investment), in hopes of driving some return (revenue). So marketing activities have a return on investment. This is often referred to as a return on ad spend (or ROAS) for paid channels. However non-paid marketing channels such as organic, social and SEO have return on investments as well.

As any marketing channel or campaign is scaled, its returns eventually diminish. Ultimately the upper limit for all channels or campaigns is the size of the audience. But quality matters as well. In cases like paid digital, you may need to continuously increase the target audience in order to scale your budget. And with each broadening of the overall target, its potency is diluted a little bit. Ad tedium (where an audience tires of the same ad) is another constraint.

It is important to track your returns as accurately as possible and to monitor for diminishing returns. As diminishing returns are reached it is important to have other strategies or new campaigns and creatives queued to avoid large drops in performance.