Executive Summary

Paid digital customer acquisition is the biggest marketing channel for many consumer goods companies in today’s hyper-competitive landscape. Proactively finding shoppers and converting them into customers is an increasingly familiar activity. While it might be easier to find potential shoppers early in a company’s lifecycle, scaling customer acquisition can get expensive.

Companies advertise where people spend time, which is increasingly happening on three platforms: Facebook, Google and Amazon. In 2017, Google is expected to make $34 billion in ad revenue, Facebook is expected to earn $15 billion, and Amazon—who is still getting its feet wet—is expected to bring in $1 billion. With total digital ad spending coming to $72 billion, these three players command 69% of the digital advertising market. All three platforms started as free channels for advertisers, only to evolve into pay-to-play models, which drastically increased the costs of customer acquisition.

This piece looks at:

  • What’s happening with the digital customer acquisition landscape and why does it matter for the larger consumer ecosystem?
  • What do these developments mean for brands, investors and real estate developers?f
  • What should brands, investors and real estate developers do to take advantage of these developments in digital customer acquisition?

Takeaway

  • The price for the average Facebook ad is 9.6 times higher than it was in 2012, making it prohibitively expensive for brands to rely on the platform for customer acquisition.
  • Amazon is a nascent advertising platform that’s still accessible, but like Google and Facebook, advertising costs continue to rise.  
  • Relying on any single platform is risky. YouTube, Instagram, out-of-home, and Snapchat provide untapped opportunities to creatively reach consumers and acquire new customers.

Case Studies

Facebook, Google, Amazon, YouTube, Instagram, Snapchat

The Market: What’s happening and why does it matter?

Facebook: From free to pay-to-play

As Facebook grew in the early 2000s, it built an audience that would turn into an advertising goldmine. Facebook has a great deal of voluntarily contributed and updated information on each user. It announced Fan Pages in 2007, the first time it formally allowed companies and brands to maintain profiles. Although brands already used paid advertising methods on the site, Fan Pages gave brands the ability to build a Facebook presence by encouraging and incentivizing people to “like” their pages. Brands could then interact with these fans at a later date through the News Feed. At this time, depending on the industry, a Facebook fan was worth (defined as a factor of product spending, brand loyalty, propensity to recommend, media value, cost of acquisition and brand affinity) an average of $174. A Coca Cola-page fan was worth around $70, while a Zara-page fan was worth $405. Companies had unfiltered access to their fans. Brands could use Facebook to organically reach customers for very little money.

The organic slowdown

However, in 2012, as Facebook filed for its IPO, it had a mandate to ramp up its advertising business and turn the company into the cash cow its investors expected. The organic free-for-all came to a halt and Facebook started changing its algorithm to limit organic reach—or “how many people you can reach for free on Facebook by posting to your page.” Facebook, once a new organic acquisition channel that brands relied on for marketing and sales, was now much less lucrative.

At this time, the company started a series of initiatives to further boost its existing advertising network and organic reach shot down to 16%. This continued and by December of 2013, brands could only reach 6% of their audiences organically. For pages with more than 500K fans, it was 2%. With minimal organic reach, many companies grew frustrated—they now had to pay to “boost” their posts to generate any reach at all. All the fans brands had cultivated were almost useless with this new algorithm.

Prices to reach users on Facebook continued rising and from 2015-2016 alone, the number of advertisers on the platform went from two to five million. From the time the company filed its IPO in 2012 to 2016, the price per ad increased 9.6 times as advertisers continued flocking to the site. This drove up demand because Facebook’s ad exchange, like most big advertising systems, works on a market-based system.

While supply has grown as well, Facebook is close to reaching peak ad load. This means it can’t put more advertising spots on the platform without significantly hurting user engagement, ultimately resulting in higher prices. According to the company, its only option is to increase its user base or ensure existing users spend more time on Facebook. Making matters worse, Facebook’s advertising business continues to shift away from the desktop, with 87% of ad sales coming from mobile in Q2 2017. This means supply will continue to shrink, as mobile has a fraction of the desktop’s screen real estate.

Google: The changing tides of organic search

When Google took off as a leading search engine in 2000, companies started working to optimize their websites to rank high in search results. SEO was not free, but the return on investment was potentially massive. With some learned tactics—including excessive tagging, backlinks, and keyword stuffing—marketers had the ability to ensure that their site ranked high in search.

Google soon started seeing the potential of paid search as a revenue driver and experimented with pay-per-click models. With this system, advertisers paid a fee every time a user clicked on an ad. The program launched in beta in October of 2000 with just 350 advertisers. In 2015, over one million advertisers participated, generating billions of dollars of revenue for Google. The company also introduced Quality Score in 2008, which put the highest performing ads at the top of the page in order to drive up revenue. Now, even paid search didn’t guarantee high placement on the results page.

Organic search clicks are generally decreasing each quarter as paid takes over. This is especially true on mobile, where the screen real estate is much more limited, which is causing supply to shrink even further. This one “free” way of getting customers is now difficult and expensive.

Although paid search was very cost effective in its early days, prices continue to rise. With the average cost to reach a sale at $46 for e-commerce in 2017, the cost of acquiring shoppers is a very expensive endeavor. This may work well for expensive items, but might not for cheaper items. For example, paid search might be effective for a company like Casper—who has high average order value (AOV)—but a company selling smaller consumer goods might find the cost of paid search prohibitory.

With clicks on paid ads going up 4.3 times from 2013 to 2017, paid-search on Google is only getting more expensive.

Amazon: The Newest Platform to Acquire Customers

Amazon is a relatively new player in the digital advertising market. Search on Amazon is very specific because it occurs when shoppers are extremely close to purchasing. For advertisers, this cuts down the time and energy they have to put into qualifying people as leads, but also gives Amazon more room to command a premium. Now, when users search for a product on the site, sponsored items appear alongside traditional search results.  

With 55% of online shopping starting with searches on Amazon and 53% of 2017 e-commerce sales coming from the site, Amazon is turning into an extremely viable place for brands to advertise. Amazon has started to take advantage of this: its “other” revenue—which accounts for business lines beyond Amazon Web Services and its retail business—growing 60% and reaching $1.3 billion in its 2016 annual report. This is a partial indication that its advertising revenue has been rising. However, getting too involved with Amazon can pose a risk for brands. If Amazon begins to reformulate the algorithm or makes severe changes to its paid products, advertisers may see their efforts wasted (see Facebook and Google).

However, since the algorithm behind the search results is a secret, there is a lot of potential for experimental returns in the short term. Amazon has a trove of data on what and when shoppers are purchasing, creating a massive opportunity for just-in-time ads. Companies are preparing and building their expertise on the platform as they pull away from Google and Facebook.

Advertising agency Possible recently purchased Marketplace Ignition, which specializes in creating the most effective ads on Amazon. This includes helping brands create landing pages for Amazon search and ads that appear on Amazon’s marketplace, and using its data to buy ads around the web. Additionally, Amazon is hiring a larger ad sales team, adding a programmatic marketplace, and is beginning to work with elite brands, indicating that it is just getting started. The company poses a major threat to Facebook and Google for commerce advertising because it is able to track the entire shopper journey from interest to delivery.  

If rising costs weren’t enough, mobile will only exacerbate these problems. Less screen real estate will mean less supply and more demand, bringing prices even higher. Additionally, with services like Alexa and Google Voice becoming popular, shopping is increasingly only a command away. This gives these platforms even more power to favor certain brands and products.

Which growth opportunities exist on other platforms?

With large companies rightfully concerned that the major digital advertising platforms are ineffective, they are searching for better ways to acquire customers. Here are some opportunities besides the three major platforms:

YouTube

People go on YouTube to watch makeup tutorials, DIY how-tos, comedy or tips from their favorite YouTube celebrities. Brands are getting in on the action by not only sponsoring pre-roll ads, but also asking content producers build videos around their specific products. For example, unboxing videos are becoming more popular for items as varied as makeup, tech products, subscription boxes, and kitchen supplies, with pro-unboxer Austin Evans boasting 2.4 million subscribers. These videos have become more popular in recent years and play into the anticipation people feel when they get something new while helping them with the research phase of a purchase.

Corporations are also starting media companies specifically for YouTube. This includes the Disney-purchased Maker Studios and MiTu, which targets Hispanics. These companies produce video series on the platform to reach younger and diverse audiences, who can then start to see advertising through pre-roll ads or product placement.YouTube’s fifteen or thirty-second pre-roll ads are also a great way for start-ups to tell engaging stories about their new brands and the problems they solve.

Instagram Influencers

Instagram influencers can be engaging and cost-effective. For example, Chanel recently utilized China’s most successful supermodel and her influence on Instagram for one of its campaigns. It found that the video she put up on her feed generated way more views than the same video on the brand’s YouTube account. Additionally, Coach recently partnered with Selena Gomez and used her 96 million fans to draw more relevance for the brand.

Posts on Selena’s Instagram go for an estimated $500k, making this an expensive but engaging investment. One of her Coach posts has received four million likes and 68 thousand comments as of August 2017, resulting in each engagement costing the company around 12 cents, with millions more seeing the post. With the average price per like on Facebook coming in at 23 cents and average cost per click on Google at around $2.14, it makes sense for companies to go this route. This may work for smaller influencers as well, who can offer access to their engaged niche audiences for lower fees. Because influencers have loyal followers and their posts show up right on consumers news feeds, putting money into this platform can be a powerful way to acquire customers. Even so, with new disclosure requirements rolling out for advertising-based posts, it’s unclear if these posts will have the same effect as they did before the disclosure mandates.

Snapchat

Snapchat offers a number of ways to reach consumers with services including Snap Ads, sponsored lenses, sponsored local and nationwide geofilters, and the option to place ads in the discover feeds. Though these ads are more expensive than their paid Google search counterparts, they drive a higher level of engagement and relevance for the user. For example, although SnapAds cost around $500,000 a day, Snapchat users “play” with sponsored lenses for an average of 20 seconds. Additionally, Snapchat reaches audiences that other social media channels don’t—on a given day, 35% of Snapchat’s daily users don’t use Facebook, 46% don’t use Instagram, and 58% don’t use Facebook Messenger. And many of these Snapchat ads are underutilized. Its local geofilters have extremely low prices, averaging around $5-$10 for a small area, while still receiving a high number of views.

Outdoor Advertising and Direct Mail

Similar to the underutilized Snapchat geofilters, offline and local advertising, including mail and billboards, are becoming more cost-effective choices for companies. Companies that are looking for new avenues to reach consumers are turning to outdoor advertising, even though they can’t measure their results as clearly as on digital media channels. With an inherently engaged audience, shoppers can’t simply scroll the ads away or close them as soon as they pop up. People see them in their unobstructed form day after day, reinforcing the message.

Start-ups have started to get in on the action. Not only are they advertising outdoors, finding cheaper and more creative alternatives to reach their consumers, but they are also creating businesses to push the space forward. For example, start-up AdQuick raised $1.1 million dollars in seed funding in July, 2017. Its mission is to create a “technology first” outdoor advertising strategy. Ad buyers can use its online interface to see the different ad-selling companies and prices, and then execute their ad using the platform. It is also working on the ability to track the success of these ads. Also, start-up Pebble Post has raised $47 million to bring internet efficiencies to direct mail. It sends consumers personalized catalogs based on their web activity through the start-up’s “programmatic” direct-mail program.

Acquisitions

Some companies are using acquisitions to get their hands on the other companies’ loyal consumer bases, a way to buy an audience in bulk. For example, when Coach purchased Kate Spade, it touted access to Kate Spade’s millennial customers, who make up 60% of the customer base, as one of the major benefits of owning the company.

Going Wholesale

Although many modern companies are launching directly to the consumer, some are realizing that finding their own customers and building awareness from the ground up is challenging and expensive. In order to keep growing, some brands are looking to third-party channels that can quickly generate awareness and increase revenue. With increased brand recognition, people who see the products in stores often go to the brand’s website to find more styles and sizes. With this, companies are saving money on Google Adwords and, instead, paying some of their margins to retail stores and boutiques.

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What does the changing customer acquisition landscapes mean for you and what should you do to take advantage of it?

Brands

Controlling the cost of customer acquisition

Companies need to reevaluate the amount of money they are spending acquiring customers on Facebook, Google, and Amazon because of saturation and high prices. This is especially true from an order and customer acquisition perspective.

  • How much money are you spending on acquiring customers on Google and Facebook advertising? How much more can the costs rise before the channels provide diminishing returns?
  • How can you move from automatically using these three platforms to acquire customers and instead think through a larger and more diverse customer strategy? How could different customers or products warrant different channels?
  • Does a customer acquisition strategy focus on building the size of your base or expanding its reach? How could acquisition channels influence either or both strategies?

Scaling and finding additional customers

Trying to get additional customers who are not as responsive to your message increases prices and lowers retention.

  • How could wholesale help you improve your customer acquisition costs? How could you selectively use the channel to keep growing? Could the margins that retailers take be cheaper than the cost of your other acquisition channels if considered a marketing expense?
  • How do you tweak your product enough to engage new customers but not too much to alienate your existing fans?
  • How do you change your messaging language (e.g., verbal copy, images, video content) to reach a broader audience across different platform?
  • How could you utilize scalable investments in paid influencers to attract more customers?

Experimenting with new acquisition platforms

Brands should constantly experiment with new acquisition platforms since finding economical customer acquisition platforms is different for each brand.

  • Are there any untapped opportunities for geo-advertising you are missing out on? This includes local digital advertising on Snapchat or out-of-home ads that might be more cost effective?
  • Is your product catered to a specific niche that would make sense to reach by partnering with a YouTube series? Would your product benefit from YouTube or Instagram influencers who can posts in relevant contexts?
  • Can you tell your brand’s story through an engaging video? How can this help you gain customers via YouTube pre-roll ads?
  • Do you have the relevant voices on your team to sustain changes in the market? Does this present an opportunity for new organization structure or potential temporary/freelance hires?

Investors

Long-term customer acquisition costs

Customer acquisition costs in the short and long-term have large impacts on a business’s potential longevity. This makes it vital for investors to keep their eyes on all of the customer acquisition platforms out there, new ones that are popping up, and innovative ways their portfolio companies can acquire more customers throughout a business’s lifecycle.

  • Is the business’s cost to acquire customers sustainable for the next few years if prices keep rising on the major platforms? How can you forecast theses costs and their benefits when you make a decision whether to invest in a company and price the valuation accordingly?
  • What are the forecasted returns on customer acquisition investment? Does the company have enough expected earned media value and margin to warrant the current customer acquisition strategy or does it need to be bolder/more cautious?
  • Are the companies using alternative acquisition channels to make its efforts more sustainable and profitable? Are they thinking about these major issues and do they have a plan to tackle them?   

Cultivating relationships with the three major platforms

Investors should also have relationships with the three major platforms in order to keep abreast of any changes in the algorithm that are coming up and learn strategies for dealing with them.  

  • Do platforms stand in the way of your companies reaching their customers or do they have direct connections that can last? How much do your companies email or other minimally filtered channels?
  • If costs rise on the major platforms your companies are relying on, what is the plan to keep the business growing with these increased costs?
  • What is the maximum price your companies are willing to spend to acquire customers before they become too expensive for their value?
  • What are growing opportunity areas that your companies can capitalize on to offset growing ad costs? How can you recommend platforms to your companies based on their different upsides and downsides?
  • What are the differential and growing customer segments of the three major players that portfolio companies could take advantage of? How does this compare to the smaller, growing channels?

Retaining and pleasing existing customers

Focusing on customer acquisition should also include retaining customers and making new and better products for existing customers. Maintaining repeat and current customers can mitigate the costs of customer acquisition tactics, helping the company grow sustainably.

  • Are your companies acquiring and then retaining customers, or are they repeatedly trying to acquire the same customers who have already churned?
  • How long can your companies keep raising money before they have to turn profitable or fuel advertising with cash flow?
  • Have customers started making multiple purchases or do they purchase once and then go buy somewhere else? Should your companies focus on subscriptions to ensure repeat purchases or is there a better strategy they can focus on?

Real Estate Developers

Helping companies overcome online struggles

Direct to consumer brands are going back to wholesale to acquire customers. These brands have realized that getting customers on their own is a huge expense that may not be the most effective way to sustain their business.

  • How can you compete with Facebook, Google, and Amazon by equating the benefits of your ready-to-purchase foot traffic to what brands get from advertising online? What assets do you have to offer that lower acquisition costs?
  • How can you integrate online and offline customer acquisition strategies, without exhausting the customer’s willingness to engage?
  • How can you utilize technologies that allow customers to engage with both physical and digital media to create a seamless brand experience?
  • What data, metrics, and ways of putting this information together can you use to show brands the value of being around physical, foot-traffic? How can you put it in “digital marketing terms?”

Catering to companies that need new customers

Brands that are on the hunt for new customers have different needs than more established brands who are more focused on sales per square foot and other more traditional metrics.

  • What do brands that are looking for new customers need that are different from the more established brands? How can you change your pricing structure, lease terms, provide smaller retail spaces in more prominent locations that allow brands to test and learn?
  • How can you market your existing retail spaces differently to companies that need new customers? What benefits and case studies can you use to show that your stores drive customer acquisition?

Facilitating geo and outdoor advertising

Geo and outdoor advertising is becoming more important for brands as they try to catch consumers offline and stand out among the mass of brands trying to reach similar shoppers.

  • How can you partner with brands like Snapchat that provide geo advertising based on location? How can you encourage and facilitate the brands that sell in your properties to take advantage of the cheap and effective advertising Snapchat provides in store?
  • How can you use free wifi creatively to help brands in your stores acquire more customers? Is capturing email addresses in exchange for wifi the only way to provide value or can you create systems that attract new customers to various stores?
  • How can you change your media partnerships to better fit the new media landscape. Instead of relying on deals with movie studios and other big players how can you partner with YouTube celebrities, YouTube media channels, and other newer influencers to promote products and your stores?

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Going Forward

Although a direct to consumer strategy promises to take out the middleman and lower prices for consumers, the cost to acquire customers will continue increase for the foreseeable future.

Brands that have launched on the premise of low customer acquisition costs will have to rethink their strategies in order to keep their businesses stable. They’ll need to determine whether they can continue to focus solely on a direct to consumer strategy or if they should start selling wholesale or open up stores in high-traffic retail. At the same time, the high price of customer acquisition can give larger and higher-margin brands an edge as they can afford these higher costs for a longer period of time.  Companies that have the lowest costs relative to the economic potential of their customers will be in good shape. The rest are simply lining Facebook, Amazon and Google’s coffers.