Are you spending too much or too little? How much more profit can you generate if you increased the budget and what’s the point where you start losing profit. The closer you get to the saturation point the higher acquisition costs and lower your ROI. One way to calculate the point of diminishing returns in Google Ads is to run a regression analysis.
Why should you care? Diminishing Returns Matters!
At first, increasing your Google Ads budget often yields great results. Lower-hanging fruit gets picked: cheaper clicks, high-intent customers, and easy conversions. But eventually, you start chasing users who are more expensive to convert. Acquisition costs creep up, and net profits go down.
If you’re spending too little, you’re leaving money on the table. Spending too much? You’re wasting cash on expensive conversions that don’t justify the cost.
The key is finding that sweet spot—spending enough to drive maximum returns while avoiding diminishing returns.
What is the Law of Diminishing Returns?
In simple terms, the Law of Diminishing Returns means that after a certain point, every extra dollar you spend on ads brings in progressively smaller gains. For example, spending $10,000 on ads might generate $50,000 in sales, but doubling your budget to $20,000 doesn’t necessarily mean doubling your revenue to $100,000. Instead, you might see only $80,000 in sales, meaning the additional $10,000 yielded less return than the first $10,000. To maximize profitability, your goal should be to find the optimal budget—the point where your spend generates the highest net profit rather than just revenue. Let’s assume you’re running an e-commerce selling appliances and you’re enjoying a 30% profit margin.
Currently, your monthly Google Ads spend is $10,000, and here’s what your campaign performance looks like:
- Revenue: $50,000
- Return on Ad Spend (ROAS): 5x
- Net Profit: $5,000
(Revenue x Profit Margin – Ad Spend = $50,000 x 0.3 – $10,000)
Encouraged by the results, you increase your budget to $20,000 per month. After 30 days, the data shows:
- Revenue: $90,000
- ROAS: 4.5x
- Net Profit: $7,000
(Revenue x Profit Margin – Ad Spend = $70,000 x 0.3 – $20,000)
At this point, your revenue increased significantly, but your net profit only increased by $2,000 because your ROAS dropped.
You then push the budget further to $30,000. After another month, here are the results:
- Revenue: $105,000
- ROAS: 3.5x
- Net Profit: $1,500
(Revenue x Profit Margin – Ad Spend = $105,000 x 0.3 – $30,000)
Here, despite spending an additional $10,000 in revenue, your profit tanked. This shows that you’re experiencing diminishing returns, where increased spend no longer justifies the additional revenue as it’s losing profit compared to when you were spending $20,000/month.
Finding the Optimal Spend
Based on these scenarios, your optimal budget is likely around $15,000 to $20,000 per month. Let’s estimate the performance at $17,500:
- Revenue: $80,000 (projected)
- ROAS: ~4.6x (projected)
- Net Profit: $7,500
(Revenue x Profit Margin – Ad Spend = $80,000 x 0.3 – $17,500)
At this level, you’re maximizing net profit without overspending.
As you may have guessed already, you won’t know unless you test. So test small increases or decreases in the budget (10-20% at a time) and track key metrics ROAS and Net Profit. And don’t neglect other optimisations – ad improvements, better targeting, creatives and landing pages.
Example with a real account that indeed sells appliances.
Feel free to use this Google Ads Regression Analysis Template to get an idea of your optimal spend level.
Conclusion
There is no easy or quick way to answer the question. The best option is to test yourself. It’s trial and error—eventually, you’ll find the balance between capturing the bulk of the sales and avoid overspending.
And if you can’t be bothered with that and want me to help, send an email to victor@victorserban.com I’ll be happy to help
Cheers,
Victor