Definition: Diminishing Returns Strategy

In economics, diminishing returns is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant. – Wikipedia

Or in plain English: the point of diminishing returns is the point where the amount of effort invested no longer provides enough return to make it worthwhile.

A graph explaining how diminishing returns work

In my article about moving towards a digital first strategy, I underline the importance of planning for such a change. Using a technique like diminishing returns not only allows you to plan for your digital first approach but most importantly, it lets you know when to quit and move on to something new.

So how can we use an economics principle in our marketing strategy?

The first crucial step is to define your foundation segment. Make sure this segment is highly targeted and very specific. It will most probably be your smallest in terms of volume but also your best performer. Read more about creating segments in my article regarding Effective Segmentation.

Your next step will be to determine what your point of diminishing return and your point of maximum yield. You can do this by evaluating the performance of your foundation segments.

You can now quickly determine when to broaden your segments for a higher yield and when to drop the campaign for a more performing one.

Interested in some practical examples? Check out how we increased performance thanks to this technique.