The Law of Diminishing Returns in Google Ads

Hitting a plateau in Google Ads? Even the best campaigns managed by the best account managers can’t defy the Law of Diminishing Returns. Understanding this economic principle is crucial to getting a grasp of the sweet spot where ROI is at its upper limit. This law is relevant to many areas of life, including marketing. In the context of Google Ads and other channels, the law of diminishing returns means that as you increase ad spend, you will eventually see a decrease in the return on investment of your campaigns.

Definition of the Law of Diminishing Returns

The law of diminishing returns is a simple economic concept to understand, yet many don’t wish it to be true. It states that there is a point at which additional investment in Google Ads will no longer yield proportional returns. This means that each additional dollar, pound, or other currency you spend on ads will generate less and less revenue.

This law is often illustrated with a graph called a response curve. A response curve shows the relationship between the amount of investment and the resulting benefit. There are three main types of response curves:

Linear Response Curve

This is the ideal scenario where every additional dollar invested yields a proportional increase in return. While it’s a desirable outcome, it’s often not realistic in real-world marketing scenarios, especially as competition intensifies and channel saturation occurs. This response curve can appear when there is not enough data or the analysis period is too low.

Diminishing Returns Response Curve

This is the most common curve we see in Google Ads. As the ad spend increases, a significant increase in performance can be seen initially. However, after continuous investment, the rate of return will start to decline. It’s often called a Bell Curve or Gaussian Curve. The reasons behind this phenomenon are often diminishing relevance of the ads to the target audience, market saturation or channel saturation, ad fatigue, and economic slowdown.

Hitting a plateau in returns doesn’t mean the Google Ads campaigns are a failure. It just means that you’re spending more money to reach a smaller and smaller group of people who haven’t yet seen your ad or purchased from your business.

Negative Returns Response Curve

In this scenario, further investment in Google Ads can actually lead to a decrease in performance. This might happen if you’re targeting irrelevant keywords that are not suitable for your business offer, using poor ad copy, or failing to stay competitive in the market (low unique selling points).

These curves can be observed by looking at your own KPIs vs ad spend. If you are a lead gen business, you may want to take a look at calls, submitted lead forms, or cost per lead vs ad spend. If you are an eCommerce business, you should be analyzing the number of conversions, ATCs, begin checkout, add payment info, or cost per conversion vs ad spend. In either case, the time period should be chosen based on the volume.

Why do diminishing returns happen in Google Ads?

The law of diminishing returns often manifests in Google Ads due to a combination of factors:

1. New competitors. Bidding on the same audience by multiple businesses will eventually lead to diminishing returns for those who bid inefficiently.
2. Market saturation. As more advertisers compete for the same audience, it becomes harder to stand out and achieve significant ROI.
3. Irrelevant keyword targeting: As you expand your keyword targeting, you may inadvertently include terms that are less relevant to your target audience. The same goes for irrelevant audience targeting. This can lead to higher cost per conversion and increased wasted ad spend.
4. Ad fatigue. This reason is usually paired with paid media (Facebook Ads, Instagram Ads, Tiktok Ads, etc.). Repeated exposure to the same ads can lead to viewer fatigue, reducing the campaign’s performance over time. Time to refresh those ads.
5. Low Unique Selling Points. If your ads don’t differentiate your products or services for competitors, the CPA will increase. Free shipping, warranty, gifts, discounts, high quality, after-sales services, etc.

Tips & tricks for Mitigation

There are several things you can do to mitigate the impact of the law of diminishing returns in Google Ads. Here are 5 tips

1. Optimize your campaigns and identify wasted ad spend. Analyze performance metrics like click-through rates, conversion rates, and cost per acquisition to identify underperforming elements.
2. Explore other advertising platforms to reach a different audience. Consider platforms like social media, email marketing, or content marketing to reach new segments of your target audience.
3. Focus on qualified audiences. Target users who have previously visited your website or interacted with your brand. Reach users who are actively searching for products or services similar to yours.
4. Increase your Average Order Value. Encourage customers to purchase additional products or services related to their initial purchase. Offer discounts or promotions for customers who purchase multiple items together. Use limited-time offers or scarcity tactics to incentivize purchases.
5. Expand your business horizontally. Explore complementary offerings that can attract new customers and increase revenue. Target other geographic regions or industries. Collaborate with complementary businesses to reach a wider audience and increase sales.

The Law of Diminishing Returns is a natural phenomenon that occurs in all areas of life, including marketing. In the context of Google Ads, the law of diminishing returns means that as you continue to increase your ad spend, you will eventually see a decrease in the return on your investment (ROI). However, by following the tips and tricks outlined in this blog post, you can help to mitigate the impact of the law of diminishing returns and get the most out of your Google Ads campaigns.