Law Of Diminishing Returns

1. Law Of Diminishing Returns Sales and Promotion Budgets

2. Law Of Diminishing Returns • In economics, law stating that if one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point. • For example: • if more and more laborers are added to harvest a wheat field • at some point each additional laborer will add relatively less output than his predecessor did • simply because he has less and less of the fixed amount of land to work with. • The principle later accepted as an economic law underlying all productive enterprise. The Columbia Encyclopedia, Sixth Edition.  2001-05. 

3. Promotion Budgets • Increases in Promotion Budget have Diminishing Returns: • The first $1,500,000 buys 36% awareness; • Spending another $1,500,000 (for a total of $3,000,000) buys approximately 50%. • The second $1,500,000 buys only 14% more awareness. Foundations Student Guide 2010 page 18 14% 36%

4. Promotion Budgets • First $500 yields 8% • Next $500 yields 13% • Next $500 yields 15% • Next $500 yields 9% • Next $500 yields 3% • Next $500 yields 2%

5. Promotion Budgets • Awareness • Each year 1/3 of those who knew about a product forget about it • When 100% Awareness is achieved, spending $1,400,000/year will maintain that level • Applied by product 33%

6. Sales Budgets • Accessibility • Companies must have at least 2 products in a segment to achieve 100% accessibility • Diminishing returns: • Product at $3,000,000 • Segment at $4,500,000 • When 100% Accessibility is achieved, spending $3,300,000/year across the multiple products in the segment will maintain that level • Applied by Segment