I bet you’ve heard this before: “We need to double our marketing budget to double our results.” 

Of course, marketing doesn’t work like that, and pretending it does costs companies millions. I had a chat with our CEO, Bryan Karas, earlier this week and we got to talking about the marketing dragon that refuses to die:

Diminishing returns.

*DUN-DUN-DUUUUN sound effect*

As of last month, a report from Marketing Interactive showed that over 70% of marketers are experiencing diminishing returns on paid social. If you’re not sure whether or not you’re in that group, you probably are.

Defining Diminishing Returns: The Marketing Reality Check Nobody Wants to Face

A way to look at diminishing returns is: imagine you’re watering a plant. A little water brings it back to life. More water helps it thrive. But pour an entire bucket on it? You’ve drowned the poor thing and wasted most of your water.

Marketing budgets work the exact same way, and the numbers tell the story:

• You start small: Drop $1, get $3 back. You have a goal of a 200% ROAS, so you figure you can keep spending.
• You go bigger: Pump in $10,000 and average about $2 for each dollar. Still good. Or…maybe not.

Here’s where almost everyone screws up. Marketing teams obsess over the average return across all that spending instead of asking what each additional dollar is actually doing for them. 

Bryan emphasizes this:

“When companies target an average return like 2x, they’re missing the point entirely. About half your spend performs above target and half below. You end up overspending because you’re watching the wrong number. What matters isn’t your average return but your marginal return on that last dollar spent.”

What’s Your Marginal Goal? The Question Nobody’s Asking

It’s not the total revenue divided by total spent. It’s simpler and more brutal than that. 

Marginal return asks: “What did that LAST dollar I spent actually bring back?” This question terrifies marketing teams. Why? 

Because marketers love vanity metrics. They’re seductive, they’re easy to track, and they almost always paint a prettier picture than looking at marginal returns.

A recent client situation shows this perfectly. Despite reporting strong ROI, we identified poor marginal returns as Meta was taking credit for other marketing activities: “They’re running TikTok Shop, they’re running influencers pushing to TikTok Shop, and they’re running sales. It picks up on the sale activity and influencer activity, and then your paid ads are taking credit for that.” Bryan shares.

How to Measure True Marginal Returns

Theory aside, let’s get practical.  Here’s how to accurately measure marginal returns:

1. Media Mix Modeling (MMM) – Analyzes how each marketing channel contributes to sales, considering diminishing returns.
2. Lift Testing – The “gold standard” according to our CEO. This involves controlled experiments where you increase spending in some areas while keeping others the same to measure the incremental impact.
3. Geo Testing – This is like lift testing but done in different (but similar) locations to see how spending changes affect results.
4. Attribution Modeling – Although often containing large holes of data, it’s very helpful directionally, and data-driven attribution continues to improve.  

(An aside: If you would like a deep dive into attribution, MMM, and testing, we just released a podcast episode featuring Bryan and Northbeam’s CEO, Austin Harrison, where they both talk about attribution, analytics, creative testing, and other sexy marketing topics! Watch it here.)

How to Fight Diminishing Returns

Every performance-focused channel will eventually hit a ceiling and stop being profitable. Here’s a simple framework to calculate where your marketing efforts are hitting diminishing returns – and what to do to combat them:

1. Track incremental spending: Document increases in campaign spending over time across channels.
2. Measure corresponding revenue changes: For each spending increment, calculate the additional revenue generated.
3. Run MMM analyses at regular intervals; these will show you which channels were actually contributing to your revenue, and at what levels.
4. Build a continuous experimentation structure to help capture real-time market fluctuations that MMM won’t pick up. For instance, when TikTok was facing possible regulation, many advertisers pulled budget out of the channel, and CPMs plummeted – leaving more aggressive marketers to reap performance gains in the moment.
5. Consider mixing up or blending campaign goals to avoid over-indexing on performance. For instance, we layered in a reach goal alongside a conversions goal in one client’s Meta campaigns last year; not only did we increase reach by 80%, we dropped overall CPA by 20%.
6. Consider new channels that reach net-new audiences, especially channels with storytelling context that can enable you to leave a lasting and positive impression with consumers. Our current favorite channel that combines quantitative and qualitative functions is CTV – which still has early-adoption cost advantages for the time being.

When we open up a more holistic perspective to truly assess incrementality and diminishing returns, we tend to find lots of opportunity to grow by investing in performance branding campaigns in the upper funnel. 

The Path Forward: Respecting the Limits

Understanding diminishing returns isn’t about abandoning growth—it’s about pursuing sustainable, efficient growth that respects economic reality. By focusing on marginal returns rather than average performance, you can:

– Optimize budget allocation across various channels

– Spot new opportunities as current channels reach their limits

– Create more accurate forecasts and expectations

– Showcase marketing’s financial accountability to the entire organization

The key to this game is to chase better returns instead of chasing big budgets. This means acknowledging diminishing returns and marginal returns.

Are you ready to take an honest look at your marginal returns? Let’s talk.