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Marketing Dollars and Diminishing Returns

  |  June 28, 2001   |  Comments

If you were hungry, you would get the most utility out of the first apple you consumed, slightly less from the second, and so on. Spending money on advertising can be like that. It's not a perfect analogy, but it has its place.

The goal of any company's marketing plan is to bring in returns on the money being spent. Whether that return consists of developing long-term brand value or bringing in immediate returns usually depends on the nature of the advertiser and what it's selling.

It's very difficult for a start-up to invest in major branding exercises when it has a small amount of capital and might not be around long enough to reap the benefits before running out of cash. It is usually the bigger, more established companies that put the bulk of their ad efforts toward building and developing their brand and consumer reach.

Either way, though (and as hard as it may be to believe), everyone has a limited marketing budget and has to use it responsibly, particularly in today's market. Money needs to be allocated to strategies and placements that are going to bring in the most returns. Experimenting and testing are always required, but today marketers are generally more prone to spending money on proven strategies.

A client whose ad budgets had been cut back (no surprise, these days) asked me recently about the strategy that we had been using. Overall, our strategy had been successful for the client; however, with his budget cut so significantly, he asked which of the media strategies are most likely to convert best and therefore should be continued under the new circumstances.

I explained that his situation is similar to the utility theory from economics: Basically, with most products, you get the most use or benefit from the first unit purchased and consumed. For example, if you were hungry, you would get the most utility out of the first apple you consumed, slightly less from the second, and so on.

Essentially, applying this theory to a media strategy would result in the first dollar being spent toward the placement that will likely yield the greatest return, the second dollar being spent on the next-best-converting placement, and so on, until the last dollar is spent.

Another client our agency recently worked with was operating a start-up retail site; his sole goal for advertising was to generate sales. Branding was definitely not the issue. Essentially, the client gave us a minimum sales ratio that he could accept and said any strategy that we thought would bring in that sales level for every dollar spent was acceptable.

We basically began by creating a list of strategies, starting with the most efficient approach we could use and ending with those we believed would just meet the client's minimum requirement. That is not the typical client approach, but it was a survival marketing strategy that worked in helping to get the company off the ground.

This approach may be, to some extent, considered a bit like eating around the ant hole until nothing is left to eat -- that is, it's not a sustainable process, and you eventually run out of options. But in the critical start-up phase, it can work for many Web advertisers in helping to establish a sales channel.

The law of diminishing returns and utility theory are in effect across many scenarios, including interactive advertising. Especially in a company's start-up stage, it is important to recognize where your ad dollars are being optimally spent and what should be avoided. Having a strategic plan of attack could make all the difference in building a sustainable, growing business.

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ABOUT THE AUTHOR

Adam Posman

Adam Posman is a strategic planner with BAM Strategy, a leading digital agency with offices in Montreal and Toronto. BAM's core services include strategic planning, media buying, creative production, online contests, email marketing, and customized marketing technologies.

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