What is The law of diminishing returns?
I hope you guys paid attention in your Economics classes. In Capsim, the law of diminishing returns is the decrease of marginal gain as the amount of money invested increased. If you are interested in the law of diminishing returns, here is a link from Investopedia that I think is useful and easy to understand.
For example, in Marketing Sales and Promotion budgets, the increases in Customer awareness decrease as you spend more money.
I made another chart so you can see the diminishing returns better:
As you guys can see the 1.5 million budget is the sweet spot as it is recommended in Marketing module, I think (or maybe 1.4 million sorry guys I can’t remember). Spending 1.5 million in Promotion budget will get you about 35-36% Customer awareness gain for the next round. However, this increase has diminishing returns as adding another 1.5 million invested will only give you around 14%.
How much should you spend on TQM and Marketing budgets in Capsim?
– Budget: Just spend as recommended – between 1.5 to 2 million for both Promotion and Sales budget in Marketing tab and 1.5 million for each of TQM options. You can spend a total of 4 million for each category of TQM starting round 3, so a common strategy is 1.5 million for round 3, another 1.5 million for round 4 and 1 million for round 5.
– Aggressive: 2 to 2.5 million for Promotion and Sales budget and 2 million for TQM. However, remember that TQM’s benefits will cap at 4 million so you only need to spend 2 million on each TQM category for 2 rounds, making it faster to reach maximum benefits. The downside of this is it will need a bunch of money to invest.
Which way to choose – calculations and consideration
1. The benefits:
The benefits of having higher budgets for marketing show up right in the first round. Your team will have high Customer awareness and Accessibility, which affects the sales of this round and later rounds.
Look at the Low-End segment in round 1, I’m doing an analytic for you guys but it is going to be long so don’t hate me. Too long didn’t read: Go aggressively, produce more Low-end sensors and pick affordable price for Round 1 Low end segment.
– Feat has the highest Customer awareness with 2 million promotion budget, second-highest Accessibility with 2.2 million sales budget and second-highest customer survey point. Team F sold more than 2000 sensors while having lowest production expenses (MTBF was only 13000). They made really good money right in round 1
– Dell had 21 customer survey point with only 1.5 million spent on promotion and 1.2 million in sales budget. However, I doubt that team D were super profitable in this segment since their MTBF was too high, making their production expenses higher than other teams.
– Bread – super budget spending and price was okay. I think they stockout because every other teams sold out too and Customer had no choice.
– Acre: team A had R&D their low-end sensor in the wrong way and had highest sensor price. They also had highest budgets for Marketing of 5.1 million in total. The reason their sensor sold very well was probably like Bread – every team sold out.
– Cedar – Team C had lowest price and they also R&D their sensor to be better (not like team A) and got 23 point in customer survey. However, their sensor was almost out of the Customer criteria since the requirements for Round 1 were Pfmn 2.2 and Size 17.8. Even though I think Cedar could have sold better if team C produced about 2000 sensors, they could easily sell 1700-2000 sensors thanks to its super cheap price.
Let’s say your team has 6 sensors in round 3, if you want to win Capsim and play it aggressively, you will need to spend around 6-11 million extra on Marketing and TQM (an extra of 0.5 million for each sensor – that is 0.5*2*6 = 6 million – and 0.5 million more for each of TQM category – or 0.5*10 = 5 million). It means that you need a cashflow of 6-11 million, and maybe even more than that if you have more than 6 products or you want to spent even more, on top of what you have spent on R&D, Production, Marketing and H&R.
Playing Capsim the aggressive way requires some important Capsim Finance strategy that I posted here so check that post out. You don’t want to go all in and get Emergency loan. I would recommend going all in for Round 1,2,3 to get the advantages over your competitors if you know how to avoid Emergency loan. In round 5 you can make some adjustments depends on how everybody does.