April 12, 2023

The Curve

Here is our image from yesterday.

The key to any Marketing Budget Simulation (this topic is being explored and will come together as we work through our examples) is to understand the law of diminishing returns. The law is apparent in the image above. The red line depicts this relationship.
  • 900 new customers on $0 spent.
  • 2,385 new customers on $50,000 spent.
  • 3,000 new customers on $100,000 spent.
  • 3,472 new customers on $150,000 spent.
  • 3,870 new customers on $200,000 spent.
If you spend nothing, you still get 900 new customers. This is an important finding, one we'll talk about tomorrow.

If you spend $50,000, you get 2,385 - 900 = 1,485 new customers.

If you spend an additional $50,000, you get 3,000 - 2,385 = 615 new customers.

If you spend an additional $50,000, you get 3,472 - 3,000 = 472 new customers.

If you spend an additional $50,000, you get 3,870 - 3,472 = 398 new customers.

This is the law of diminishing returns. You spend more, you get less.

This law dominates marketing spend. Sometimes this relationship is absolutely punitive, sometimes it is nearly linear (suggesting that the brand could spend a lot on marketing and not be penalized).

This curve, this "law of diminishing returns" dictates everything we do. It's the reason we cannot spend a ton of money. You see the results via ROAS ... old school marketers see it via the ad-to-sales ratio (which is the inverse of ROAS). Eventually your tactics simply no longer work.

This curve, interestingly, can be used to simulate the relationship between short-term profit and long-term profit (i.e. CLV or LTV or whatever you want to call long-term value). If you know how much a customer delivers in the future and you know the relationship above, you can find the place where your business is healthiest over time.

And if you manage your categories appropriately, you lift these curves, allowing you to spend more.

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