Are you paying attention to the diminishing marginal revenues in paid advertising?

Are you paying attention to the diminishing marginal revenues in paid advertising?

The first slurp of mushroom soup tastes amazing. The pleasure exponentially decays over each successive slurp as the hunger subsides

VEDANARAYANAN VEDANTHAM

VEDANARAYANAN VEDANTHAM

In the above sentence, you could replace the object (mushroom soup) and the action (slurping/ tasting) with almost anything under the sun and it would still make absolute sense. This is derived from the ‘Law of Diminishing Marginal Utility’, which a lot of people misunderstand to be an economics theory. It is not. It is a life theory.


A different reason applies in the context of “pull marketing”. Most channels which come under this category are highly competitive with multiple brands vying for the same piece of real estate in order to get better, more premium consumer eyeballs. Most digital channels which come under this category follow a real time auction with the cost per user engagement or click increasing as brands attempt to increase scale higher and higher, since the bids keep going up. Google Adwords is the best example of this behavior.


In summary – Marketers today need to understand that critical inflection point across both “Push” and “Pull” marketing channels beyond which they are getting as much incremental returns as the pleasure they would get from their tenth slurp of the mushroom soup mentioned in the beginning of the article…


In paid advertising, attempts to increase scale beyond a point result in increasingly smaller incremental returns for marketers. Everyone knows this. But there are different reasons for this which vary by channel.