February 11, 2024

Diminishing Returns In Action

Maybe you don't believe all of the diminishing returns curves you see me present, in one form or another. So let's take a one-day detour into the world of Major League Baseball.

The image below evaluates data for MLB team spend and number of wins the team earned during the 2023 season.



The orange line represents a fitted power function (a*x^b). On the bottom right of the image, you can see how much money you have to spend to buy wins.
  • Going from $100 million in payroll to $150 million yields about 4.4 wins per season ... the difference between a team going 80-82 vs. 76-86, approximately.
  • Going from $150 million to $200 million yields 3.3 wins per season.
  • Going from $200 million to $250 million yields 2.6 wins per season.
  • Going from $250 million to $300 million yields 2.2 wins per season.
So a $100 million payroll team can expect to go 75-87. A $300 million payroll team can expect to go 88-74.

If you were an executive running a baseball team, you'd probably ask yourself if you truly had to spend $200 million to purchase 12 additional wins ... or was there "something else" in the data that could be used to manufacture 12 additional wins???

But notice diminishing returns happening in baseball. Each additional fifty million dollars buys you fewer wins.

The same things happens in your business ... quite literally everywhere. Each additional customer is generally worth less. Each additional product you offer is generally worth less. Each additional marketing dollar is generally worth less.

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