In one line
Diminishing returns means each extra euro of spend adds less than the one before. A response curve plots return against spend, and it flattens as the channel saturates.
What it does
- The first euros reach people who have not seen the brand recently. Later euros mostly reach the same people again.
- Mix models use saturation curves, such as the Hill curve, so double the spend never means double the sales.
- The best spend is where the next euro stops paying back a euro. Past that point, average return can still look fine while the last euros lose money.
Business and brand
Impact on the businessP&L, cash, share price
- Average return hides the marginal return, which is what a budget decision changes.
- Moving money from a saturated channel to an unsaturated one can lift profit at the same budget.
- Cutting the last euros of a saturated channel saves money and loses little.
Impact on the brandMemory, loyalty, pricing power
- Brand media saturates more slowly than activation because memory keeps building.
- Spreading reach over time beats bursts that hit the same people again.
- A small brand often sits on the steep part of the curve.
Try it
Spend more in one quarter
Choose a channel and spend more or less on it for one quarter. The engine follows the next two years and plots the extra gross profit against what you spent.
Extra gross profit, two years€1.87m
Average return per €1€1.42
The next €1 returns€1.35
Spend in the quarter →
Notice: At €1.3m the average euro returns €1.42, but the next euro returns €1.35. It still pays: the curve is above the break-even slope.
Runs Countermove's market engine: the reference soft-drinks market, three brands, rivals holding their plans so only your change moves the result.
Sources
- Hanssens, Parsons & Schultz (2001), Market Response Models, Kluwer
- Jin, Wang, Sun, Chan & Koehler (2017), Google: Bayesian media mix modelling with carry-over and shape effects
- Sethuraman, Tellis & Briesch (2011), Journal of Marketing Research