Experts are predicting that, by 2023, search engine marketing (SEM) will become an $80 billion business. And for good reason: from building brand awareness to driving website traffic to retargeting prospects and closing conversions, SEM can and should play a critical role in your digital advertising strategy.

Search advertising spending only becomes a problem when you buy into the all-too-common myth that increased spending will lead to a proportionate increase in results. What business wouldn’t want to increase their spending when they’re guaranteed the same ROI they’ve been earning, only on a bigger scale?

Unfortunately, SEM spending doesn’t work like that. While a small search advertising budget could certainly reap the benefits of increased spending, search—and all other advertising campaigns, for that matter—is still subject to the law of diminishing returns.

If you ignore this risk of diminishing returns, you’re likely setting up your ad strategy to underperform. On the other hand, businesses that recognize this risk of diminishing returns can fine-tune their larger ad strategy to optimize spending not just through search campaigns, but across all of your brand’s digital advertising channels.

Why Diminishing Returns Are Inevitable for SEM

The law of diminishing returns argues that, after reaching your optimal spending volume for SEM campaigns, your business will inevitably reach a point where the returns on your spending fail to meet your prior threshold for success. While your search advertising returns may still be profitable, the rate of return is likely to slip below the earnings you could probably achieve by shifting that spending over to another campaign.

A number of factors are at play when search returns begin to slow. These include:

  • Market saturation. If you’re targeting the same users over and over, these exposures themselves will produce diminishing returns after reaching an optimal number of interactions. On the other hand, increased SEM might expand the audience for your ad campaigns, which can carry the unintended consequence of reducing audience relevance—and a less relevant audience is less likely to click or be interested in your brand.
  • Less relevant keywords. As you expand your SEM across a broader range of keywords, you’re likely diluting the quality of those keywords and making them less relevant, resulting in fewer clicks. At the same time, those keywords may actually cost more—which, when combined with worse performance, can sink your ROI.
  • Impacts to your Quality Score. As the quality and relevance of your SEM campaigns decline, your Quality Score also goes down. This lower Quality Score could actually exclude you from auctions for certain keywords, and even increase the CPC you’re required to pay to claim that ad space.

Recommendations on How to Improve Your SEM Returns

Does the law of diminishing returns mean that you have to scale back your SEM, or even scrap plans to expand your spending? Not necessarily. If you believe your SEM campaigns have room for growth, or that strategic optimizations can stave off these diminishing returns, you have a number of options at your disposal.

Here are some recommendations for improving and reinforcing your SEM success:

  • Diversify your search ads. Whether targeting the same audience or expanding into new territories or audience groups, different messaging can help you improve each ad’s relevance to that audience—or simply to engage existing targets by taking a new angle.
  • Increase your Quality Score, if possible. Google’s Quality Score is charted on a scale of 1-10, with 10 being the best. If you aren’t earning 10s, use the QS subcomponents to identify areas where you can make changes that yield a higher score.
  • Track your Share of Voice (SOV) metric in Google Analytics. This data point can help you understand your brand’s position in the market, revealing insights not just about your search campaign performance, but your customer relationships and customer perceptions as a whole.
  • Target different parts of the funnel. Shifting your SEM focus may help you capture new value from search advertising even as you expand your spending. Instead of focusing on awareness-level campaigns, for example, consider building a search strategy that targets consumers close to making a decision.

How to Calculate the Point of Diminishing Return

Each business can calculate the point of diminishing returns—for search ads or other forms of spending—on its own. While these calculations are best performed using a modelling software or, at the very least, an Excel spreadsheet, you can determine the point of diminishing returns using ad performance data over at least 12 months, including basic performance metrics and generated revenue from that spending.

That period of campaign spending should also feature significant change in spending levels, making it easy to chart variations in campaign performance as ROI has changed. If you don’t identify a clear point of diminishing returns, it’s possible that you haven’t yet reached that point, or that you don’t have enough data and variation to reach a conclusion.

Whether you’re already past your point of diminishing returns, or you’re simply worried that your ad performance might start to taper off in the near future, it might be time to connect with a trusted advertising partner that can evaluate campaign performance and optimize spending and ROI across all of your digital advertising channels. Contact Cox Media today to see how we can help.