Why The Law Of Diminishing Marginal Returns Matters For Marketers

Introduction

Diminishing Returns (DR) in Marketing Spend optimization is the law that states that as spend increases, the incremental value received decreases.

You’ve seen it happen.

The first ₹1 million in ad spend? Magic. Your ROAS spikes, leads pour in, and the team’s pumped. So naturally, you double down: ₹5M, then ₹10M.

But something shifts.

Suddenly, conversions crawl. The same channels stop delivering. Your ROI flattens. And leadership’s asking the dreaded question: “Why isn’t more budget getting us better results?”

This isn’t bad luck or a broken campaign. It’s a predictable phenomenon - one economists have known about since the 1700s. Recent studies underscore this trend in the digital marketing landscape. A report by Taboola reveals that nearly 75% of performance marketers are experiencing diminishing returns on their social media ad investments.

It’s called the Law of Diminishing Marginal Returns, and it shows up in marketing more than most marketers realise.

In this blog, you’ll learn what it means, how it plays out in real campaigns, and—most importantly—how to work with it, not against it, especially when you’re using tools like Marketing Mix Modeling (MMM) to optimise spend.

What Is the Law of Diminishing Marginal Returns?

Diminishing returns (DR) is a universal law that explains why efficiency improvement slows as marketing spending increases.

The law of diminishing marginal returns states that when one input increases, such as marketing spend, while other factors remain constant, the resulting output or return will eventually decrease. In marketing, this means that each additional dollar spent generates less incremental revenue over time, making it essential to focus on smart budget allocation rather than simply increasing spend.

How This Plays Out in Marketing

The law of diminishing marginal returns shows up clearly when marketers keep increasing their spending and expect the same results. At first, you might see incredible gains from a campaign. But over time, each additional dollar you spend delivers less and less value.

Let's consider a firm that allocates $10 million for marketing. The company’s total revenue is approximately $325 million, resulting in an ROI of $32 for every dollar spent.

At this level, they're delivering +16 ppt incremental value over the baseline—$275M revenue, in this case.

If nothing else is changed (launch a new product, increased competitor pressure), how much additional marketing spend is needed to deliver the same incremental value?

In this case, to achieve an additional +16 ppt incremental value, we need to spend $100 million in marketing. The resulting ROI is 3.7!

That’s diminishing returns in action. You’re spending 10 times more for the same impact, but getting only a fraction of the value per dollar.

This scenario plays out across digital and traditional channels alike. Whether you're running ads on Meta, TV, or YouTube, there's always a point where increasing investment stops producing proportional results. Audience saturation kicks in, engagement drops, and your returns begin to flatten.

In media mix models like Robyn or Meridian, this is often visible through diminishing response curves. The model shows a sharp rise in efficiency at the beginning, followed by a gradual decline as spending increases. This curve helps you understand when to stop scaling and start reallocating.

Consequences

When marketers keep increasing their spending without adjusting their strategy, they often run into media saturation. The cause of media saturation is overspending in media, which is due to DR at the channel level. Achieving higher sales targets by merely increasing ad spend becomes exponentially harder. Here’s what that looks like in practice:

• Overspending on saturated channels: A campaign that worked well early on starts underperforming as the audience becomes overexposed.
• Falling ROI despite higher budgets: Each additional dollar spent delivers less incremental value, causing the return on investment to decline.
• Increased cost per conversion: As efficiency drops, the same results cost significantly more to achieve.
• Plateauing performance metrics: Conversions, clicks, or revenue flatten out, even with more investment.
• Wasted budget opportunities: Valuable funds are locked into channels that no longer scale effectively, rather than being reallocated to better-performing areas.

This effect isn’t limited to traditional media. Digital channels offer advanced options like targeting and personalization, but the DR applies to them just like traditional marketing channels.

Why Diminishing Returns Happen in Marketing

Diminishing returns don’t happen by accident. They follow predictable patterns rooted in how audiences behave and how campaigns are executed. Here are the most common reasons why marketing performance slows down, even when you increase spend:

1. Channel Saturation: You’ve already reached most of your addressable audience. Additional impressions hit the same users repeatedly, offering little to no incremental lift.
2. Audience Overlap: Targeting settings often result in overlapping segments across campaigns or platforms. You end up paying multiple times to reach the same people.
3. Creative Fatigue: When the same ad is shown too often, engagement drops. Audiences stop noticing or responding to the message, even if targeting is spot-on.
4. Timing Mismatches: Rapid spikes in spend may not align with real-world purchase intent. If you're increasing your budget too quickly, your message may not be absorbed effectively.

These factors compound quickly. Without visibility into them, teams often misdiagnose the issue and assume they need better creatives or higher bids, when in reality, they’re facing the natural limits of marginal return.

Diminishing Marginal Returns vs. Diminishing Returns to Scale: What’s the Difference?

It’s easy to confuse diminishing marginal returns with diminishing returns to scale, but they refer to different concepts.

• Diminishing marginal returns occur in the short term, when you increase one input (like marketing budget) while keeping others constant (like team size or tech stack). At some point, each additional unit of input yields smaller gains. This is the effect most marketers run into when scaling campaigns too quickly.
• Diminishing returns to scale, on the other hand, relate to the long-term scenario where all inputs are variable: budget, resources, tools, and people. Even then, output might not grow in proportion to the input. It’s more about structural inefficiencies as you scale the entire operation.

For marketers, especially those using Marketing Mix Modeling, it’s diminishing marginal returns that matter most. They show up during budget planning, channel optimization, and campaign scaling, where one input (spend) increases while others stay fixed.

How to Work With (Not Against) Diminishing Returns

The law of diminishing marginal returns isn't something you can outspend. Instead, the goal is to recognise when you're hitting the limits and adjust your strategy to stay efficient. Here’s how you can work with the law instead of fighting it:

1. Reallocate Budget Before Performance Drops: Use MMM insights to shift spend from saturated channels to ones with room to grow. Don’t wait for ROI to collapse—act on early warning signs.
2. Diversify Your Inputs: Test new creatives, experiment with different formats, and reach untapped audience segments. Sometimes, a small change can reset the performance curve.
3. Stagger Your Campaigns: Avoid running the same message across multiple channels all at once. Spread spend across time to give audiences space and improve absorption.
4. Use MMM Data to Guide Spend Levels: Marketing Mix Modeling helps you visualise spend-response curves. This tells you exactly when a channel starts delivering less value and where to cap your investment.
5. Focus on Marginal Lift, Not Total Volume: Don’t just track total revenue. Measure how much incremental value your next dollar is generating. That’s the clearest sign of when to pause, scale, or shift.

Common Mistakes Marketers Make (And How to Avoid Them)

When marketing results start slowing down, the first instinct is often to spend more. But that approach can backfire if you're already deep into diminishing returns territory. Let’s look at the most common pitfalls—and how to avoid them.

1. Assuming More Budget Means More Conversions

It’s a common trap. A campaign performs well, so you scale the budget expecting proportional results. But instead of doubling conversions, your cost per acquisition creeps up, and returns slow down. This is classic diminishing returns in action.

How to avoid it:

• Model projected outcomes using tools like MMM or incrementality testing
• Watch for flattening ROAS or engagement before scaling budgets
• Set performance thresholds and only scale when marginal efficiency holds steady

2. Overinvesting in High-Performing Channels

Just because a channel performed well at one budget level doesn’t mean it can absorb 2x or 3x the investment. Every channel has a saturation point where returns begin to taper off.

How to avoid it:

• Monitor channel-level diminishing return curves in your MMM dashboard
• Cap spend where the marginal ROI drops below your target threshold
• Diversify the budget across channels instead of concentrating on one “winner”

3. Ignoring Diminishing Returns in MMM Validation

Even with MMM, some teams fail to revisit assumptions or check whether they’re still within efficient spend zones. If the model shows saturation but the strategy doesn’t reflect it, performance suffers.

How to avoid it:

• Recalibrate MMM inputs quarterly to reflect updated spend behavior
• Create cross-functional review loops between media planners and model owners
• Use MMM outputs to set channel-level spend guardrails during planning

4. Focusing on Total Results Instead of Marginal Impact

Total conversions or revenue might look healthy, but the last $100K you spent might have done very little. Without tracking marginal lift, you risk mistaking scale for success.

How to avoid it:

• Track marginal CPA or marginal ROAS alongside total metrics
• Break down campaign impact by spend tiers (e.g., first $1M vs second $1M)
• Train teams to prioritize incremental lift over volume-based metrics

5. Relying Too Heavily on Short-Term Wins

It’s tempting to chase quick wins—flash sales, limited-time offers, and high-frequency retargeting. These can drive spikes in revenue, but they also accelerate ad fatigue and audience saturation, pushing you into diminishing returns faster than expected.

How to avoid it:

• Balance short-term tactics with long-term brand-building campaigns
• Monitor frequency caps and engagement drop-offs in performance reports
• Use MMM to separate short-term lifts from sustainable growth drivers

Final words

The concept of diminishing returns was first introduced during the early days of the Industrial Revolution. In the 18th century, economists like Turgot and Ricardo observed that adding more inputs, like labour or capital, to a fixed resource led to progressively smaller gains in output.

As they put it, “Each increase [in an input] would be less and less productive.”

What started as a theory rooted in agriculture and manufacturing now applies to modern marketing just as well. Whether you’re increasing ad spend, launching back-to-back promotions, or flooding the same audience with repeated creatives, the law of diminishing marginal returns always catches up.

Today, marketers face this phenomenon across both digital and traditional channels. More budget doesn’t automatically equal more results. That’s why strategies rooted in measurement and optimization matter more than ever.

Tools like Marketing Mix Modeling (MMM) help you stay ahead of this curve. They show you where performance begins to decline, where to reallocate the budget, and how to drive maximum value from each incremental dollar spent.

The bottom line? Diminishing returns aren't a sign of failure. They're a signal to optimise, rebalance, and move smarter, not just harder.

FAQs

1. Is the law of diminishing marginal returns the same as decreasing ROI?

Not exactly. While both reflect declining performance, diminishing marginal returns specifically refer to the rate of return from each additional unit of input. ROI might stay positive overall, but the efficiency of incremental spend drops over time.

2. Does this law apply to organic marketing too, or just paid channels?

It applies to both. For example, publishing daily SEO blogs or flooding social media with too much content can lead to audience fatigue and lower engagement per post, despite increased effort.

3. How do you measure diminishing returns in a multi-channel strategy?

You can use incrementality testing, MMM, or channel-level ROI tracking to assess when additional spend across channels starts yielding smaller returns. Tools like Meta's AEM or Google's DDA can also help estimate saturation.

4. How does campaign frequency relate to diminishing returns?

High frequency can quickly lead to diminishing engagement. Once an ad is seen too many times by the same audience, its effectiveness drops, regardless of budget size or targeting.

5. Is there a point where increasing spend actually hurts performance?

Yes. This is known as negative returns—when the additional investment not only fails to add value but actively decreases efficiency. It often happens when a channel is pushed well past saturation.

6. How often should teams check for signs of diminishing returns?

At least monthly for active campaigns and quarterly during planning cycles. Rapid changes in channel performance or customer behaviour can accelerate the onset of diminishing returns.