What Does the Point of Diminishing Return Mean?

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Author: Steve Moundzouris

Article source: http://dailyfinds.com/. Used with author's permission.

Advertising, what does the point of diminishing return mean?

The point of diminishing return simply means that no matter how much more money you spend on advertising, your gross sales will only increase in small increment, if any at all.

Below are some sample budgets for a single product showing how diminishing return can affect your profits and sales.

Example 1
Product: Widgets
Price: $100.00
Monthly Ad Budget: 2k
Monthly Widget Sales: 30
Gross Revenue: $3,000.00
Less Advertising: $2,000.00
Gross Profit: $1,000.00

Example 2
Product: Widgets
Price: $100.00
Monthly Ad Budget: 3k
Monthly Widget Sales: 35
Gross Revenue: $3,500.00
Less Advertising: $3,000.00
Gross Profit: $500.00

Example 3
Product: Widgets
Price: $100.00
Monthly Ad Budget: 4k
Monthly Widget Sales: 40
Gross Revenue: $4,000.00
Less Advertising: $4,000.00
Gross Profit: $0.00

The examples above clearly illustrate that sometime spending more money does not necessarily mean making more profit. It doesn't take a rocket scientist to figure out that example 1 is clearly the most cost efficient budget. Assuming that without the advertising the merchant wouldn't have any sales.

When you're planning your advertising budget, take into consideration the demand for your product and always be very careful when adding dollars to your advertising, just because your selling 30 widgets when you spend 2k per month doesn't mean if you spend 4k you'll sell 40 widgets.