I have discussed the broad theme of creating profitable customers in B2C companies in many of my past writings. It may seem repetitive writing about it again, but each time there are new ideas which make the narrative better. In this series, I will dig deeper into atomic rewards, how to create great experiences for the best, what to do with the long (“lossy”) tail and how to improve new acquisition. A simple customer segmentation framework I had used last year will guide us: Best-Rest-Test-Next.
Let’s start by looking back at the world of advertising. In the beginning, the rise of mass media (print, radio, TV, outdoor) coincided with the growth of advertising. It was all about building the brand. Media platforms aggregated audiences, and brands targeted them as a cohort. This worked fine until the Internet came along with its promise of targeting and tracking for customer acquisition. This led to the rise of performance marketing and adtech.
The past two decades have been the golden period of the Adtech Era. The platforms, Google and Facebook, have seen their market cap grow immensely on the back of creating an easy point-and-click approach to targeting ads and acquiring new customers. Every business wants a continuing pipeline for conversion, and the tech platforms have done this amazingly well. Aided by the big ad agencies, the duo sucks away an increasing percentage of revenues from companies hungry for growth. New customer acquisition has never been easier, thanks to Google and Facebook. As VCs, PEs and public markets have rewarded growth over profits, companies have channelled resources for new customer acquisition. Google’s stock price is up 10X in the past decade, and despite various diversifications, targeted and contextual ads remain its primary revenue driver. Facebook has used acquisitions like Instagram and WhatsApp to cement its leadership position, and its stock price is up 3X in the past 5 years.
While advertising remains the lifeblood of the Internet business model, it is starting to fray. The New York Times wrote recently:
More than 20 years ago, the internet drove an upheaval in the advertising industry. It eviscerated newspapers and magazines that had relied on selling classified and print ads, and threatened to dethrone television advertising as the prime way for marketers to reach large audiences.
Instead, brands splashed their ads across websites, with their promotions often tailored to people’s specific interests. Those digital ads powered the growth of Facebook, Google and Twitter, which offered their search and social networking services to people without charge. But in exchange, people were tracked from site to site by technologies such as “cookies,” and their personal data was used to target them with relevant marketing.
Now that system, which ballooned into a $350 billion digital ad industry, is being dismantled. Driven by online privacy fears, Apple and Google have started revamping the rules around online data collection. Apple, citing the mantra of privacy, has rolled out tools that block marketers from tracking people. Google, which depends on digital ads, is trying to have it both ways by reinventing the system so it can continue aiming ads at people without exploiting access to their personal data.
Customer acquisition costs are rising rapidly with the fast flow of capital to startups and growing D2C disruptors. The pushback on tracking is making less information available for advertisers to target customers. Some online businesses are also exploring subscriptions as an alternate revenue model to advertising.