Google Ads Diminishing Returns: Find Your Scaling Limit

Most e-commerce guys really sucked at math and that might be one of the reasons why the profit margin is too low or more often when they scale suddenly profit margin falls off a cliff and it's always the situation of like, how is that even possible? It was working so well at this level. Now I'm scaling and suddenly it's not working anymore, right? And it seems like you're hitting a plateau. Again, they don't understand because they don't understand the math behind it and why it happens like this because it's actually quite simple and in today's video I will show you how it works and how you can fight this.

All right, let's start with a

little graph here. So, at one point we have the spend here, like your ad spend, and here we have the sales. So, the way most people think it works, right? It's just like, ah, I increase the spend, I increase the sales. So, it's like ideally it would be like that, right? Just a linear line and basically an infinite money glitch, right? Because if you spend this amount, you get this amount of sales and you have a great ROAS. It's like, okay, let's just 5x, 10x, 20x the budget and let's get rich. Right? Would be great. Infinite money glitch basically, but the problem is that it doesn't work like that. Why?

It doesn't work like that because in the beginning it's very easy to go after the hot audience, the hot buyers. Maybe your existing audience retargeting, right? So, you have a limited amount of ad spend, you obviously go after the easy sales first, right? Easy, nice, really profitable. But what happens if you start to scale up is that you have to go broader. Once you're done with the easy buyers, you have to tackle other audiences. You have to go broader, you have to go higher up in the funnel, which furthermore decreases the efficiency of the whole thing, right? Very straightforward. So, how does the

graph actually look like now? It's the diminishing returns curve. Basically explaining just what we talked about right now, right? And it looks like this. In the beginning, actually very easy, right? Oh, like let's draw it like that. You have the the hot buyers, the easy audience that we said. But then, again, CPC increases. You have to go broader, you have to go further up the funnel, maybe you have creative fatigue, all that stuff you you heard already multiple times before, right? But then it looks like this. And at some point it just flattens out dramatically, right? Where it's generally not profitable anymore to increase spend even further.

And the sweet spot you have to consider here is like this one, this right here. That's your point of diminishing returns, right? So, up until here, increasing the spend is generally profitable and like brings you in more profit. After that point, it doesn't make any sense anymore and you just lose efficiency, right? That's the sweet spot we we talked about before where like people scale above it and like suddenly profit margin drops a lot and it feels like you hit this plateau. Now

the question is, how do you identify this point of diminishing returns for yourself, for your brand, for your store? Quite easy. You basically just keep scaling and when you get closer to plateau where like, "Okay, we're kind of like starting to to hit the ceiling." Or you're comfortably at the at the certain level for quite some time. And you want to push further, you want to scale further and you are not quite sure, "Hey, is this generally profitable right now?" Then what to do is you first of all increase, let's say like 10 20% whatever. You wait a certain period of time, right? Like this is not something where you can scale for 3 days and then scale back again.

Like you give it some time, ideally 1 to 2 weeks, depends a little bit on your spend level as well. And then after this time period, you might got a little bit of a feeling already, but we don't do our math for profit margin based on feelings,

right? So what you want to do, you want to calculate this and I kind of like wrote the text here now. It's like the extra sales you got, right? Like the the extra sales and the extra spend. I mean, it the drawing is a little bit off here, but you want to calculate like you want to divide extra sales divided by extra spent to see the ROAS of this part after the increase, right? So not the total ROAS because the total ROAS might still be profitable, but you want to identify is this extra spend that I got here, did that bring me extra money, right?

If it's above break even still, then it's fine. If it's below break even, then it genuinely loses you money. And you have to like figure out for yourself if you're happy with break even at all if it's like, "Okay, it's not profitable enough, right?" But if I see, "Okay, extra sales, extra spend, the math doesn't line up and this aspect was genuinely unprofitable over a longer period of time," then you know, "Okay, you went past this point, right?" And again, most e-commerce brands they always kill past this point because they don't understand the math and overall it's still profitable and they always try to push it to the limit without the certain extra benefits here, right? Now

the real question is, "Okay, how can I actually scale beyond that without my profit margin completely tanking, right? Like what can you do in order to have the chart maybe like looking more like this, right? Where instead of flattening out or flattening out too early because it will eventually flat out, right? Otherwise, it would have brands with pretty much unlimited ad budget. It just doesn't exist. Doesn't make sense. But, we can make it look more like this where we hit the sweet spot somewhere here, right? Like my whiteboard might be a little bit too small, but whatever. So, means we can scale much further with way more sales and it's still really profitable before we hit our point of diminishing returns, right?

And what you can do for that, like multiple things. Of course, we will not go too much into the details here.

This is more about understanding the underlying math. What you can do to achieve that green curve is, of course, testing more creatives, right? So, you have more winning creatives and you don't rely on just a couple of winning creatives because obviously you will hit this point quicker. Test different angles, right? We said that the more you scale, the broader you have to go in terms of audiences anyway. So, if you find more winning angles, that's an aspect than simple things like geographical expansions, right? If you sell in US, for example, unlocking new markets is an obvious and easy just bringing the concept that's already working one market to different markets, right?

Along the same thing. Another thing, obviously working on your feed. So, if you have a couple of winning products that really do well, but hit the plateau down down the line, adding more products, similar products, other winning products, whatever. Helps you to achieve this outcome, right? Because basically with every new creative, every new angle, every new market, every new product that you test, the the curve resets and it starts from from there again, right? And then with every new product, with every new market, you have the same thing. And then in total, it looks more like that where you can increase spend relatively easily without hitting this point of diminishing returns too early on, right?

And that's about it. That's about it. So, like, per se, the principle is quite simple. It's not rocket science, but you need to understand it, right? Because if you

scale randomly, you scale beyond this point where it's no longer profitable, and then you're like, "Ah, how did that happen? I don't understand. My friends always scale to this level and like super cheap like that, you know?" If you don't understand it, you will eventually always scale on lower profit margin than you could actually get, right? So, that's important to understand. And that's it for today.