Are You Spending Too Much? Consider a Diminishing Returns Analysis

As you are probably aware, every dollar spent on advertising does not generate equal return. When looking at how media spend performs within a channel  (paid search for example), there is a point at which a campaign starts to bring in less revenue than what was spent. This is known as the point of diminishing returns.

In the beginning, the money you spend on advertising for a certain channel will yield a  high return, since without it, there would have been no revenue generated from the channel at all. You usually have to spend a sufficient amount in order to maximize your gains from entering a particular channel. However, as you start to spend more and more, you will see these high returns begin to taper off at a certain point. Eventually, you will be spending $1, while realizing less than $1 in revenue. It is at this point where  you have hit the point of diminishing returns. Now would be the time to consider scaling back your investment in this channel.

A diminishing returns analysis will assist you in finding out when you will reach this point. In order to do a diminishing returns analysis, you will need the following:

• 1+ years of daily data
  • Impressions/Cost/Clicks/CTR and Revenue
• Sufficient variability in how many impressions were bought or how much spend there was over time
  • This is needed in order to see how different spend levels impact revenue
  • If you don’t have variable spend, you can set up a few months to test and aim to have variable spend across that time period
    

Then, a non-linear model is built modelling revenue as a result of spend. Other variables can be brought in to help build a baseline and control for seasonality as needed. Using this model, we can then calculate the point at which each $1 of ad spend generates $1 of revenue. After this point, any additional spend will realize a high a level of return.

If there are a few brands or platforms being used within a channel (for paid search, consider Bing and Google AdWords), we can find the distinct points of diminishing returns for these segments. This allows us to spend optimally across the segments for a given budget level.

It is always a good idea to check in on your marketing channels and ensure that you are maximizing return by spending the optimal amount and ensure that you are not hitting the point of diminishing returns. This helps us maximize our return on investment and ensure we are spending enough, but not too much, within a marketing channel.