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The law of diminishing returns

I was brought up on the law of diminishing returns. This states that in any production or service process, if you increase one of the inputs without increasing the others the additional returns per unit of that input will fall. This applies to every marketing input – advertising, mailshots, even sales people. Of course, the relationship is often complicated.

For example, if you have a good sales and marketing infrastructure and strategy, but too few sales people, the first few extra sales people you take on may give you increasing marginal returns because they work well as a team and specialise. To put it another way, when one input is very low compared with the rest, you might experience increasing marginal returns.

Enough of the economics and back to marketing. Recently, I have seen the extent to which companies understand fully the economics of customer recruitment and retention, especially as it applies to new products and services and new and existing customers. I do not mean the old chestnut, “customer retention is more cost-effective than customer acquisition”, although it is part of the story – and a story that shows how rotten that chestnut is. Poor acquisition strategies lead to retention problems, so it is worth spending good money on acquiring good quality customers. Nor do I mean the Pareto 80:20 rule, though that kind of imbalanced customer profitability or value is an inevitable result of what I'm examining.