Have you ever noticed that doubling your advertising budget doesn’t necessarily double the revenue you generate from AdWords? This frustrating phenomenon has a name: the law of diminishing returns.
Originally an economic principle, the law of diminishing returns applies perfectly to digital advertising, particularly in Google Ads and Microsoft Advertising (formerly Bing Ads) campaigns. Understanding this concept can help you optimise your advertising,explore new market opportunies and achieve better results for your business.
What is the Law of Diminishing Returns?
In economics, the law of diminishing returns states that if one factor of production is increased while all others remain constant, the marginal output per unit will decline at some point.
This means that while overall production may still increase, the rate of that increase will slow down, and eventually, each additional unit of input will yield a smaller increase in output.
This principle dates back to the mid-1700s when French economist Anne Robert Jacques Turgot noticed that when you apply more and more labour to a fixed piece of land, the additional output gained from each extra unit of labour starts to diminish.
How Diminishing Returns Apply to Digital Advertising
In PPC advertising, the law of diminishing returns manifests when increasing your ad spend doesn’t produce proportional increases in results. Here’s a simple example:
Imagine you’re running a Google Ads campaign for your local plumbing business:
- With a daily budget of £50, you might get 10 qualified leads at £5 each
- Increase your budget to £100, and instead of getting 20 leads, you might only get 15 leads at £6.67 each
- Raise the budget further to £200, and you might find yourself getting only 22 leads at £9.09 each
That’s diminishing returns in action.
Why Diminishing Returns Happen in Digital Advertising
Several factors contribute to diminishing returns in digital advertising:
Limited Audience Size
There are only so many people searching for your specific products or services in your target location. Google Ads and Microsoft Advertising are fundamentally about capturing active intent, people already looking for your product or service. You’re not creating new interest out of thin air. Spending more on paid ads does not increase demand, like, say, a TV advertisement can do.
For example, if only 200 people a month are searching for plumber services in your area, pumping more money into PPC advertising won’t increase the number of people looking for this service.
Auction Competition
Both Google Ads and Microsoft Advertising use auction-based systems. As more advertisers bid on the same keywords, prices naturally rise. This is especially true in competitive industries where multiple businesses target identical search terms. With an increased budget, the amount of money you potentially pay per click can increase if you have this automated bidding as Google and Bing try to spend your budget.
Ad Fatigue
When the same people see your ads repeatedly without taking action, they develop “ad blindness.” Their engagement drops, and your ad effectiveness suffers. This is particularly common with remarketing campaigns or when targeting smaller audience segments.
The “Death Spiral” of Keyword Expansion
As you try to increase your reach, you may expand into less relevant keywords and audiences. While this can increase your reach, it can also lead to a “death spiral” if not managed carefully. Less relevant keywords may decrease your click-through rates, and Google may perceive your ads as less relevant. This will also lower your quality score for keywords, leading to increased bid costs and further reducing your campaign’s effectiveness.
Signs You’re Facing Diminishing Returns
How do you know when you’ve hit the point of diminishing returns? Watch for these telltale signs:
- Declining conversion rates: Your ads get clicks, but fewer people take the desired action
- Rising Cost Per Click (CPC) and Cost Per Acquisition (CPA): You’re paying more for each click and acquisition
- Decreasing Return On Ad Spend (ROAS): Your profit margin is shrinking
- Plateauing Click-Through Rates (CTRs): Despite increased impressions, your CTRs remain flat
- Lower engagement metrics: Time on site decreases while bounce rates increase
- Stagnant impression volume: Despite higher bids, your ads aren’t being shown more often
Strategies to Overcome Diminishing Returns
While every campaign will eventually hit diminishing returns, there are strategies to push this point further out to the right of the scale and maximise your ROI:
- Refine Targeting & Keyword Selection
- Implement negative keywords: Exclude search terms that trigger your ads but don’t convert, saving your budget for higher-quality clicks
- Leverage long-tail keywords: These more specific phrases typically have lower competition and higher intent (e.g., “emergency hot water heater repair service” instead of just “plumber”)
- Fine-tune geo-targeting and dayparting: Show your ads only in locations and during times that perform best
- Focus on High-Intent Audiences
- Implement strategic remarketing: Target people who have already shown interest in your business by creating sophisticated remarketing segments based on site behaviour
- Utilise Remarketing Lists for Search Ads (RLSA): Adjust bids for past visitors when they search for terms related to your business
- Optimise Ad Creative & Copy
- Conduct systematic A/B testing: Test different headlines, descriptions, and calls-to-action to identify what resonates with your audience
- Implement responsive search ads: Let the platforms automatically test different combinations of your ad assets
- Refresh creative regularly: Combat ad fatigue by updating your messaging and visuals before performance declines
- Manage and Re-Allocate Budget Wisely
- Cut underperforming campaigns: Don’t hesitate to pull back spend on campaigns that aren’t delivering
- Double down on winners: Identify your best-performing keywords, ad groups, or campaigns and increase investment there until you start to spot a diminishing return
- Implement automated bidding strategies: Leverage machine learning with strategies like Target ROAS or Target CPA
- Improve Your Conversion Funnel
- Optimise landing pages: Ensure your pages load quickly, clearly communicate value, and make it easy for visitors to take action
- Strengthen offers and trust signals: Compelling offers, testimonials, guarantees, and streamlined forms can all boost conversion rates
If you are facing diminishing returns, you should also look at your marketing mix for other potential opportunities. Rather than throwing good money after bad, you should look to explore new opportunities and market segments where you have not reached a point where your investment is slowing.
New Campaigns and Horizontal Targeting
When you see a specific campaign doing well, there is always the urge to pump more money into it, this is what we call scaling vertically. But we know that once you scale to a certain point, your ROAS will naturally start to decline once you hit the point of diminishing returns.
What you should do is look horizontally throughout your product catalogue. We often hear business owners say I don’t want to advertise this particular product because nobody buys it. Well, you should question this: does nobody buy it because nobody actually can see it? As in, the product has no visibility?
Many businesses have hidden gems that could do really well when pushed through paid, ds but as they are not promoted, they never realise the full potential of the product. You should test everything and try to market every product you have to see if it generates a return. This can lead you to set up more campaigns, all with a healthy ROAS. This would be a better approach than spending extra on a vertical campaign with a diminishing return.
Explore Other Advertising Platforms
When facing diminishing returns on Google Ads, consider investing in new paid channels, such as social media platforms . Social media platforms like Facebook, Instagram, and TikTok offer diverse targeting options and ad formats that can help you reach new audience segments and potentially achieve a higher return on investment.
Social media platforms offer unique advantages for building brand awareness and engagement. You can leverage social media advertising to create visually appealing ads, run interactive campaigns, and foster a community around your brand.
But be aware the same diminishing returns will also be experienced at a certain point when your ad spend starts to have a lower ROAS. But investing in this area can bring a greater return compared to spending extra on Google and Bing once your return starts to drop with higher expenditure.
Measuring & Monitoring Progress
Breaking through diminishing returns requires vigilant monitoring. Here are the key metrics to track:
- Click-Through Rate (CTR)
- Cost Per Click (CPC)
- Cost Per Acquisition (CPA)
- Return On Ad Spend (ROAS)
- Conversion Rate
- Quality Score
- Impression Share
Recommended Monitoring Schedule
- Daily: Check basic metrics and make minor adjustments
- Weekly: Analyse trends and performance by segment
- Monthly: Conduct deeper analysis and strategic planning
- Quarterly: Perform comprehensive account audits
Common Pitfalls to Avoid
In managing PPC campaigns, businesses often make these common mistakes:
- The “Set It and Forget It” Mentality: PPC requires ongoing optimisation
- Increasing Budgets Without Testing: Before scaling up, run tests to ensure additional spend will drive proportional results
- Ignoring Quality Score: This metric significantly impacts your actual cost per click
- Chasing Conversions Without Considering Value: Focus on the quality and lifetime value of the customers you acquire, not just the quantity
- Focusing Only on Revenue Instead of Profit: Simply generating more revenue may look good, but at what cost? Your business needs to be profitable
Get Help With Adwords
The law of diminishing returns isn’t a roadblock, it’s a challenge that every digital marketing advertiser must overcome. Recognising when you’ve hit diminishing returns is the first step toward addressing it effectively.
Remember that overcoming diminishing returns isn’t a one-time fix but an ongoing process. By implementing the strategies outlined in this article, you can push past plateaus and continue to achieve growth in your digital advertising campaigns, ensuring that your advertising spend delivers the best possible return on investment.
If you would like to discuss your current campaigns or explore further opportunities with your market, reach out to us today for an informal chat about where your current digital marketing activities can be improved.
Posted on Wednesday, March 19th, 2025 in Latest News.
