How the Law of Diminishing Returns Applies to Entrepreneurial Success

When’s the last time you thought about the Law of Diminishing Returns? Whether you’ve intentionally thought about it or not doesn’t really matter because it has been present in your life, regardless. “In economics, diminishing returns is the decrease in marginal output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal.” I make no claim to be astute in economics, so that definition was from Wikipedia. 

Now, this may not feel all too relevant to you, at least not yet. But let me put it into a real-world example. Consider an entrepreneur with 8 hours in her workday. In addition to available time to complete work, other factors include mental capacity and work that needs to be completed. Assume the entrepreneur has already decided how much mental capacity and paid work is available to her at present. She is still deciding on how much time she should spend working each day. As she increases the amount of time from 8 to 10 hours, the output of her work will increase. It may also reach a point (enter 12-hour workdays!) where the output actually begins to decrease since it’s possible to reach the upper limit of mental capacity and paid projects that are available to take on. For this entrepreneur, working longer days will reach a point where the extra time spent results in no additional money earned, and actually distracts from other important areas of life. The Law of Diminishing Returns has come into play.

Simply put, the Law of Diminishing Returns states that there will be a point where the additional output of X gained from one additional unit of Y will be smaller than the additional output of X from the previous increase in Y. At some point, there will be less profit for the same increases. This holds true in the most important areas of life. More is not always better. And in fact, more can sometimes cause things to become worse, less efficient, more costly, less enjoyable.

In this blog, I challenge you to pay close attention to finding the point of diminishing returns in your own life, personally and professionally, so you can maximize your output while not needlessly wasting input. Keep reading to learn my tips for helping you identify where this point exists.

What is your variable and what are your constants?

In most cases, you’ll have the ability to play around with what these are. Start by identifying what you can adjust, realistically and fairly quickly. Like in the example I gave, this might be the hours you’re willing and able to work. Or for you, maybe that’s a constant. Others could be income, the number of employees you hire and manage, the amount of product you can produce, or the size and location of your office space. It should be fairly easy to create a hierarchy of what’s most adaptable and impactful, to what is not. It should come as no surprise that I am the example I gave. My equation focuses on maximizing my time to yield the highest possible income. Where I find success is hovering right over that point of diminishing returns where more time no longer means more money. I pull back before I dip too far down that curve. 

What do you value as the outcome?

This should go without saying, but it’s worth calling out. Your equation and desired outcome are going to look different than someone else’s. Where some people want more money, other people want minimized stress. And where some people want to grow a bigger business with a broader reach and more employees, other people want the most simplistic business model possible. What do you value as your greatest outcome? Select an intersection where two ideals meet. For example: where the fewest number of work hours results in the great possible outcome. Or where the most efficient team yields the highest quality of work. This is the point you want to work to hit and then stop at before venturing too far down the other slide of the slope.

When does more no longer result in better?

Okay, you know your constants and variables and you know your desired outcome/intersection, but how do you measure these so that you know where your point of diminishing returns exists? That’s a question you need to work to answer and continue to refine. Preface it this way…”More is better until more results in…” And then fill in the blank. Exhaustive work hours? An imbalance of personal life? An HR nightmare? Too much overhead? If you’re only measuring your bottom line but forget about these other key elements, you’re really missing the bigger picture! I’ve ridden shoulder-to-shoulder with fellow entrepreneurs who have created businesses that have exploded in growth – well beyond my own if you’re only measuring the bottom line profit. But I can tell you, my work-life balance and earnings per work hour are far greater. And these are the benefits that are harder to measure if you’re not paying attention!

How can you balance your life at the point of diminishing return?

Recognizing your personal equation, and identifying the unique point you want to reach is only part of the puzzle. The remaining piece that creates a complete picture is learning how to balance at that optimal point so that you’re working smarter and every aspect of your business is at optimal function. Maintaining balance takes effort but becomes easier with practice. You will start to get a natural feel for when things are balanced – and when they are not. Back to that original example about the entrepreneur and work hours. If at the end of a particularly hectic month where that entrepreneur felt like she was putting in far greater hours, she runs her invoices only to find her income has not increased, this is a tell-tale sign the balance is off. No matter your personal scenario, you will fall off balance from time to time. That’s okay. Just don’t let too much time pass before you revisit your equation and make adjustments to be back to your point of diminishing returns. This law exists not only to help you identify optimal performance but to also help you maintain it!

Do you pay attention to where your own point of diminishing returns exists within your life? This looks different for everyone, so I would love to hear how yours impacts your personal and professional choices as it relates to time management. Join the discussion by leaving a comment below.

3 thoughts on “How the Law of Diminishing Returns Applies to Entrepreneurial Success

  1. Thanks Stephanie for this post. It provides lots of fruits for thought. Many people operate at the gut level without a conscious effort on what is optimal or diminishing return after that point. Not that intuition does not count (it does), only that’s not very scientific. For me, training for a marathon means finding a pace that I can squeeze the most distance out of every step for the duration. And I can definitely relate to the law of diminishing return when I am tired.

    1. Very well put and as a fellow runner, I appreciate the analogy! To take it further, runners each have a unique goal for what they hope to achieve from their relationship with running. I don’t train for races, but rather my optimal pace is one where I am enjoying myself, feel slightly challenged, but retain enough energy to go the extra mile (literally and figuratively). I will reach a point of diminishing return if I run for too long outside of this pace, then something must be sacrificed for something else. How smart to apply this same concept to finding the right “pace” in your career – I’m glad you can relate!

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