Mental Model

Diminishing Returns (or why more of the same stops working)

Each additional unit of effort gives you less output than the one before it. Here's how diminishing returns shape business decisions — and life.

Here's something everyone knows and few think carefully about: doing more of the same thing eventually stops working.

The first cup of coffee in the morning? Transformative. The second? Pretty good. The fifth? You're just jittery and your hands are shaking during a client call.

That's diminishing returns. Each additional unit of effort (or money, or time, or coffee) gives you less output than the one before it. Still some output. Just less.

Most bad decisions in business come from ignoring this. From treating the relationship between input and output as a straight line, when it's a curve that flattens.

Where you see it in business

Diminishing returns show up everywhere once you start looking. Here are a few places that matter.

Hiring. The first engineer you hire might 10x your output. The 50th engineer adds capacity, and also adds coordination costs, meetings, and Slack channels. There's a reason the mythical "two people in a garage" can sometimes ship faster than a team of 200.

Product features. The core features that solve the customer's main problem create enormous value. Feature number 47 (a dark mode toggle for the settings page) probably doesn't move the needle. Worse, it adds maintenance burden that slows down everything else.

Pricing optimization. Going from "we just picked a number" to thoughtful pricing can double your revenue. Going from good pricing to perfect pricing might get you another 3%. Same type of work, wildly different returns.

The two biggest examples worth examining in detail are market saturation and marketing channels.

Market saturation: the ceiling you can't see

Every market has a natural size, defined by how many people actually want to buy what you're selling at the price you're charging.

Early on, you're picking low-hanging fruit. Your first customers are the people who really need your product. They find you, or you find them easily. Growth feels almost effortless.

Then it gets harder. You've captured the obvious segment. Now you're reaching people who are a bit less interested, a bit harder to convince, a bit more price-sensitive. Your cost per acquisition goes up. Your conversion rates go down. You're working harder for each new customer.

This is market saturation, and it's a textbook case of diminishing returns.

The tricky part is that it doesn't announce itself. There's no email that says "Congratulations, you've now reached 60% of your addressable market and things are about to get expensive." It just slowly gets harder, and if you're not paying attention, you'll keep throwing money at a channel or segment that's running dry.

When that happens, find new segments, new geographies, or new products. Recognize when the curve is flattening and go where the slope is still steep.

Marketing channels: where diminishing returns hit hardest

Let's say you discover that Google Ads works brilliantly for your SaaS product. You spend 10,000 kr a month and get 50 paying customers. Amazing. So you spend 20,000 kr. You get 85 customers. Still great. You spend 50,000 kr. You get 140 customers.

See the pattern? Your cost per customer went from 200 kr to 235 kr to 357 kr. Each additional krona produced less than the one before it.

Why does this happen? Several reasons. You start by bidding on the most relevant, highest-intent keywords. Those are the cheap ones (relatively speaking) with the best conversion rates. As you spend more, you have to bid on broader terms, compete more aggressively on the good ones, and reach people who are further from buying.

The same applies to every channel. Facebook ads, LinkedIn ads, content marketing, SEO, influencer partnerships, cold outreach. Each one has a curve that starts steep and flattens.

This is why the best marketers diversify across channels, putting money where the marginal return is highest. When Google Ads starts to flatten, LinkedIn might still have room. When paid channels generally get expensive, organic content and SEO might offer better returns per krona.

Always put your next krona where it'll work hardest. That means constantly testing, measuring, and shifting budget between channels.

Now let's get a bit technical: Cobb-Douglas functions

(Fair warning: this section involves some math. Feel free to skip it if that's not your thing. If you stick around, it's genuinely useful.)

Economists have a neat way of describing diminishing returns mathematically. It's called a Cobb-Douglas function, named after Charles Cobb and Paul Douglas who published it in 1928. Originally used to describe how an economy's output depends on labor and capital, it turns out to be applicable to all sorts of things.

The basic idea looks like this:

Y = A · x₁^α · x₂^β

Where Y is your output, x₁ and x₂ are your inputs, and α and β are exponents between 0 and 1 that determine how much each input contributes.

The magic is in those exponents. Because α is less than 1, doubling x₁ gives you less than double Y. That's diminishing returns, expressed as a formula.

And the real power of Cobb-Douglas shows up when you have multiple inputs working together.

Let's apply this to marketing channels. Say your total leads (Y) depend on how much you spend on 3 channels: Google Ads (G), LinkedIn (L), and Content Marketing (C).

Leads = A · G^0.4 · L^0.3 · C^0.3

What does this tell us?

Each individual channel has diminishing returns (all exponents are less than 1). Google Ads has the highest exponent (0.4), so it's your most effective channel per krona, all else being equal. And spreading your spend across channels will always outperform dumping it all into one.

Let's say you have a budget of 90,000 kr. Compare two scenarios:

Scenario A: All-in on Google Ads
Leads = A · 90,000^0.4 · 0 · 0 = 0. (Zero spend on the other channels means zero leads in this model, which is a bit extreme. The math still makes the point.)

Ok, let's say you keep a token spend on the others. So let's try:

Scenario B: Concentrated spend
Google: 80,000 kr, LinkedIn: 5,000 kr, Content: 5,000 kr

Scenario C: Balanced spend
Google: 40,000 kr, LinkedIn: 25,000 kr, Content: 25,000 kr

If you run the numbers (with A = 1 for simplicity):

Scenario B: 80,000^0.4 × 5,000^0.3 × 5,000^0.3 = ~96.7 × 13.6 × 13.6 ≈ 17,883

Scenario C: 40,000^0.4 × 25,000^0.3 × 25,000^0.3 = ~66.4 × 22.1 × 22.1 ≈ 32,426

Same total budget. The balanced approach produces 81% more leads.

Cobb-Douglas tells you, mathematically, that diversification wins.

(The exact numbers here are made up, obviously. Your actual exponents would depend on your business, your market, and a hundred other things. The structural insight is what matters.)

Diminishing returns in life

Here's where it gets personal.

Economists talk about "utility" as a way of measuring how satisfied or happy you are. Each source of happiness in your life has diminishing returns, just like a marketing channel.

Going from no exercise to regular exercise is life-changing. Going from running 3 times a week to running 6 times a week is helpful, with smaller marginal gains (and rising injury risk). Going from 6 times to twice a day? You've probably crossed into territory where it's making your life worse.

Same with money. Going from struggling to pay rent to financial stability is a massive jump in wellbeing. Going from earning 500,000 kr to 1,000,000 kr is nice. Going from 5,000,000 to 10,000,000? Research consistently shows the happiness impact is minimal.

Same with career achievements. The first big promotion feels incredible. The fifth one is just... more responsibility.

Your life satisfaction can be described by a Cobb-Douglas function of multiple inputs:

Life satisfaction = Health^α × Relationships^β × Career^γ × Finances^δ × Purpose^ε × Fun^ζ

Each factor has diminishing returns individually. And together, they multiply. A person who is moderately healthy, has good relationships, finds meaning in their work, is financially stable, has a sense of purpose, and regularly has fun will score higher on life satisfaction than a person who is world-class in one area and neglected the others.

This is the Cobb-Douglas insight applied to life: balance compounds.

Think about the person who works 80-hour weeks and earns a fortune. No friends. A wrecked body. A strained family. The single spike in career/money can't compensate for the collapsed dimensions everywhere else. The math and the intuition point in the same direction.

The spider diagram: a tool for self-assessment

The spider diagram (or radar chart) is a useful way to visualize this. Rate yourself from 1 to 10 on each dimension of your life:

Health. Physical fitness, energy levels, sleep quality, diet.

Family. Depth and quality of your closest relationships.

Friends. Social connections outside family and work.

Career. Professional growth, engagement, sense of accomplishment.

Finances. Stability, freedom, absence of money-related stress.

Purpose. Feeling that what you do matters. Contribution to something bigger than yourself.

Plot these on a spider diagram. The area of the shape you create is a rough proxy for your overall life satisfaction. Because of how geometry works, a balanced shape (where all dimensions are roughly equal) will always have more area than a spiky shape with the same total points. Same math as the Cobb-Douglas function: a product of moderate numbers is larger than a product of one big number and several small ones.

If one axis on your spider diagram is obviously lagging behind the others, that's where your next unit of effort will produce the highest return. That low-scoring axis is where the curve is still steep.

Put your effort where the returns are steepest.

The takeaway

Diminishing returns is one of those ideas that's simple to understand and hard to act on. We're wired to double down on what's already working. It feels safe. It feels productive. The math points somewhere else.

Pay attention to the curve. When it starts to flatten, shift your effort to where the slope is still steep. This applies to marketing budgets, product development, hiring, and life.

The Cobb-Douglas function captures a structural truth: when multiple inputs matter, spreading your resources across them produces more total output than concentrating everything in one place. True for marketing channels. True for how you design your life.

Your next unit of effort should go where it'll produce the most output. That's it.