Published November 11, 2022
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Title Explainer
Digital Marketing is broken. Most marketers know it but will not acknowledge it publicly. Optimisation is being done at the margins but that’s not a real fix. This is about to change. In this series, I will outline the current digital marketing framework, what is wrong with it (discontents) and the innovations that will provide the solutions (disruptions).
Before I get to marketing, a short brief on the title. The inspiration comes from Francis Fukuyama’s recently published book “Liberalism and its Discontents.” (When I did a search, I came across two more books by well-known authors with “and its Discontents” – Sigmund Freud on civilisation, and Joseph Stiglitz on globalisation.)
Fukuyama’s preface to his book provides the context for (classical) liberalism’s discontents: “By “liberalism,” I refer to the doctrine that first emerged in the second half of the seventeenth century that argued for the limitation of the powers of governments through law and ultimately constitutions …Liberalism has been challenged in recent years not just by populists of the right, but from a renewed progressive left as well. The critique from this quarter evolved from a charge—correct in itself—that liberal societies were not living up to their own ideals of equal treatment of all groups. This critique broadened over time to attack the underlying principles of liberalism itself, such as its positing of rights in individuals rather than groups, the premise of universal human equality on which constitutions and liberal rights have been based, and the value of free speech and scientific rationalism as methods of apprehending truth. In practice, this has led to intolerance of views that deviate from the new progressive orthodoxy, and the use of different forms of social and state power to enforce that orthodoxy. Dissident voices have been ousted from positions of influence and books effectively banned, often not by governments but by powerful organizations that control their mass distribution…These threats to liberalism are not symmetrical. The one coming from the right is more immediate and political; the one on the left is primarily cultural and therefore slower-acting. Both are driven by discontents with liberalism that do not have to do with the essence of the doctrine, but rather with the way in which certain sound liberal ideas have been interpreted and pushed to extremes. The answer to these discontents is not to abandon liberalism as such, but to moderate it.”
Digital Marketing too is facing threats from two sides: new customer acquisition and existing customer retention. CAC (customer acquisition cost) has been rising rapidly while competition for a brand’s existing customers combined with attention recession is forcing marketers to offer discounts and coupons to lure them back. Both are hurting profitability and creating angst amongst business leaders: how to ensure continuing growth amidst these twin challenges of increasing costs and decreasing loyalty? While liberalism, in the words of Fukuyama, needs moderation, digital marketing needs a disruption. In the past 15 years, marketers have obsessed about new customers rather than building better and deeper relationships with existing customers. They have fed the ravenous appetites of Google and Meta who now tower over the consumer industry with their near-monopolistic powers. To be fair, the duo has earned it by providing exactly what marketers want: outcome-based pricing for new customers. Now, this spending is sucking away more and more money each year and marketers have lost control of and connect with their existing customers. This is where a quartet of disruptions offers hope for marketers. Just as Fukuyama’s recommendations offer a path to liberalism’s roots, the disruptions I will outline will take marketing to its roots: bring back existing customers for more and ensure they bring their friends. These new ideas, if successful, also provide a market-driven solution to reduce the powers of Big Adtech – as an alternative to the regulatory and judicial efforts underway in many countries.
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Framework
Here is the framework I like to use for digital marketing. There are two parts: new customer acquisition and existing customer retention (which includes engagement, upsell, cross-sell and referrals). New customer acquisition is now largely driven via the Big Adtech platforms like Google and Meta via performance marketing where brands pay per click or per conversion action (from form fill to transaction). Existing customer relationships have two components: push messages sent by brands via email, SMS, app and browser push notifications, and WhatsApp, and the actions done on the brand’s properties (website and app) which include martech capabilities like unified customer view, journey orchestration, search and omnichannel personalisation. The push messages are key because they help bring customers back to the properties. [I have ignored ‘digital branding’ campaigns since this is not a very large line item in most marketing budgets.] 85-90% of marketing budgets are spent on the acquisition (adtech) side, with only 10-15% left for retention (martech).
An essay on mParticle discusses the two strategies:
Marketers and Product Managers at consumer brands, who at all times are tasked with leveraging a limited budget to drive growth, face a challenge: Do you invest more in creating better relationships with your existing customers or on expanding your customer base by acquiring new customers? Maintaining strong customer relationships is critical, as your existing customers need to be able to trust your brand, but failing to make prospective customers aware of your brand may limit results.
Customer acquisition is the act of promoting your brand and designing onboarding/conversion experiences in a way that leads prospective customers to make their first conversion. Depending on your business, this initial conversion could be a purchase, subscription, app download, order, etc. The process of acquiring a new customer may take several steps as the prospective customer moves from being blissfully unaware of your brand, to considering your product against other options, to making a decision to buy.
While customer acquisition is the act of gaining new customers, customer retention is focused on developing better relationships with your existing customers with the goal of increasing loyalty and driving repeat purchases. Successful customer retention depends on secure data management and delivering contextual messaging that is inline with each customers’ preferences and interests.
Customer acquisition strategies discussed in the essay are paid media, paid search and content marketing. Customer retention strategies discussed are paid retargeting, email marketing, in-app recommendations and customer support.
Here is a graphical view of the digital marketing framework:
With this framework, we can now discuss the discontents.
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Discontents
I recently spoke with the founder-CEO of a fast-growing D2C brand. I asked her about the top challenges she was facing. She answered, “How do I get my loyal customers coming back more often for repeat purchases? How do I communicate better to my customers by reducing email drop-offs? How do I identify my best customers and treat them differently on my website? How do I get my customers to know about the money accumulated in their wallets from cashbacks for referrals done? How do I reduce my CAC which has increased 45% in the past year?”
All her concerns can be distilled into three categories: rising CAC in digital ads, attention recession in push messages, and suboptimal experience on properties. These are the discontents facing most consumer-facing brands. At a time when investor capital is becoming scarce, there is now an urgency to solving these problems and demonstrating profitable growth.
So, this is how the marketing framework now looks:
Let us understand these three discontents better.
Rising CAC in digital ads: Google and Meta have established a very powerful duopoly when it comes to digital advertising. Their auction-driven system for placing targeted ads has driven up pricing rapidly as demand has increased rapidly in the post-pandemic era. Digital consumers means that brands have to reach them digitally rather than traditional platforms. For most brands, CAC has doubled in the past two years – leading to a similar doubling of marketing budgets since acquisition is the biggest spending line item. Brands are even dependent on Big Adtech for retargeting their existing customers (remarketing).
Attention recession in push messages: Brands need the push messages to bring their customers back to their properties because most brands do not have the brand recall that ensures their customers return on their own. The problem with push messages is that their visibility is low. Email open rates tend to be sub-10%, SMS even lower while push notifications face the dual problems of being blocked and delivery. While WhatsApp has emerged as a new interactive channel, its cost (4 times of an SMS and 25-50 times that of an email) limits its use cases.
Suboptimal experience on properties: When customers do visit the brand’s properties (website / app), their experience is not always the best. Customers expect personalization but brands don’t have adequate data to do that well; data is either siloed in different martech point solutions or simply not available for most customers. Most brands use substandard search which means that items do not show up even though they may be in the catalog. Brands also are not using contextual walkthrough solutions to guide customers to the next best action through the complexity of their properties. Improper calculations of customer lifetime value (CLV) means that their actual Best customers do not experience differentiation which could increase their loyalty.
Each of us is a customer of dozens of brands. We know the digital experience leaves a lot to be desired. And yet, we have no way to tell the brand. We simply turn (churn) to other brands – a sort of ‘quiet quitting.’ This forces brands to spend even more on new acquisition creating a vicious money-sucking black hole. Digital marketing, which once seemed the path to utopia of exponential forever profitable growth, has become a cash drain of epic proportions for most brands. So, what are founders and marketers to do?
As our conversation went on, I was asked another question by the aforementioned D2C brand CEO: “How do I address these challenges? I have a sense that they are all related and there is a root cause. Where do I begin?” In other words, she was asking: “What is the crux?” That is what we turn to next. But before that, we need to take a small detour.
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AdWaste
With 85-90% of digital marketing budgets being spent on acquisition (adtech), this is the first place to probe deeper. Brands do most of their new customer acquisition via Google and Meta. Search and social have become the two primary spending destinations. This chart from the Economist shows where the money is being spent – $300B goes to the Google-Meta duopoly.
Big Adtech’s success (Google and Meta’s combined revenues have trebled in the past 5 years – a VAGR of 25%) has given them tremendous power, one which regulators globally are working to curtail. For brands, this has meant escalating marketing budgets which have hit profitability.
My belief is that AdWaste accounts for half of the marketing spend on digital platforms – close to $200 billion. This happens because of wrong acquisition and reacquisition. Wrong acquisition happens when an acquired customer doesn’t transact or uninstalls the app within days of having installed it. Marketers pay for the click but get nothing out of it. Reacquisition is when a brand’s existing customer is reacquired via retargeting because that customer became inactive (or churned).
Here is a model that helps estimate AdWaste.
Consider 4 categories of customers: Left, Test, Rest, Best – in ascending order of value. Let’s take 100 acquired customers on which the brand spends $1 each for a total of $100. Let’s further assume that the 100 customers are split 50:50 – half leave shortly after acquisition (or can be attributed to click fraud), while the other half stay. Of the ones who stay, 20% can be considered Best, the bottom 30% as Test while the middle 50% are the Rest. Best Customers are the most valuable customers – typically, they (20% of the base) deliver 60% revenue and 200% of profits). There is a power law at work in terms of revenues.
The $1 spent on Left customers is a complete write-off. Of the other 50, let’s assume about 20% customers are reacquired (proportionately in the other 3 categories) – this spending too could have been avoided. Best and Test customers are the two extremes – Best being the most loyal, while Test are mostly inactive. Rest Customers are the ones in the middle – can go to either Best or Test. The economic value for the brand looks like this:
Thus, from the $100 spent, the value derived by the brand comes to $48 – meaning that the other $52 has been wasted. In other words, half of the digital spending does not provide any value. This is what I term AdWaste. Across industry, this is a $200 billion problem – but one which few marketers are openly willing to discuss.
Mark Gardner wrote in May 2022 while assessing the challenges faced by Google and Facebook: “According to marketing outfit WordStream’s analysis of $3 billion in annual advertising expenditure, the average click-through rate (the number of clicks that your advertisement receives divided by the number of times your advertisement is shown) is 2.35%. In his book entitled Subprime Attention Crisis: Advertising and the Time Bomb at the Heart of the Internet, Tim Hwang maintains that many of the promises about online advertising are flawed. Hwang highlights the decline in the efficacy of the click-through rate in advertising. Originally in the mid-1990s when the first banner advertisements appeared online the click through rate was almost 50%, one in two people. Now it is extremely unusual to see a banner advertisement that does better than 0.3% or 0.4%. This suggests there has been a 100-fold decline in the impact of display advertising over a few decades.”
While there are many efforts to optimise digital ad spending, I think marketers are focused on the wrong problem. The crux of their discontents lies elsewhere.
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Hotlines as Crux
Digital marketing’s problems cannot be solved simply by optimising new customer acquisition, reacquisition (via remarketing) or improving the experience on the brand’s properties. While both are important, the crux of the brand-customer relationship lies in creating a “hotline” – two-way engagement rather than a one-way push. If brands can get existing customers to listen and engage, they can get more from them – attention, data, money, reviews, ratings and referrals. But without the hotline, marketers have little option other than spending on new acquisitions to sustain the traffic on their properties. Thus, the crux lies in converting the push pipes into hotlines.
Until recently, brands could not do much with their push messages other than publishing emails, SMSes or push notifications. These could have some images or text and invite recipients to clickthrough to a landing page. The sameness in look combined with the sense of spam made recipients ignore or block a vast number of messages. Yet, the law of large numbers works to a limited extent: lots of messages to lots of people and some actions happen.
WhatsApp – in some countries like India – has brought in some change to the push pipe. By introducing consent and interactivity, it is taking a step towards moving the conversion funnel closer to customers. Chatbots and commerce workflows are improving engagement. But the medium is expensive and can be quickly overrun with misuse even though WhatsApp offers easy options to report abuse and block brands. I believe that WhatsApp will have a definite place in the marketer’s arsenal but its high price (4 times that of an SMS in India, and 25-50 times that of an email) will restrict its use cases. Also, WhatsApp will very likely have to keep increasing its price both for its own monetisation and also to restrict spam in an inbox that most users consider as their private space for personal communications. Thus, WhatsApp will be unable to deliver the scale and frequency of communication marketers to need two-way personalised pipes.
Hotline creation is what brands missed – it is the chasm that marketers could not cross. A new hotline approach is needed: one that is open, inexpensive and frictionless in usage. Hotlines which resonate with customers are the only way for marketers to cut the wasteful spending on Big AdTech. They solidify the brand’s relationships with existing customers and reduce the dependency on continuous acquisition via auctions at accelerating prices. Hotlines are the antidote to AdWaste. The most effective hotlines are those with Best Customers.
To paraphrase what I wrote earlier: “The hotline is the crux that brands have to solve for. Get the hotline right, and they have a 2-way relationship going with the customer… The hotline is the trick marketers have missed in the two other obsessions – new customer acquisition and adding bells and whistles to the app and website… Every interaction is an opportunity to collect volunteered data that enriches the customer profile – and helps increase personalisation on not just the push channels but also the brand properties. This will become even more important in a world where privacy has taken centre stage and the efficacy of using cookies is diminishing…What brands need to realise is that it is the hotline that is the crux for their customer relationships. If they can shift the mindset from “delete” to “delight” in their messaging, it would solve every other problem for them.”
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Disruptions
There are four disruptions which promise a transformation of the brand-customer relationship; together, they will delight customers with interactivity, incentives and individualisation (omnichannel personalisation) and help brands with “profit-centric marketing.” These innovations will usher in a new era of marketing which shifts the locus of control from Big Adtech to the marketer. They are:
- Email 2.0 (interactive emails using AMP)
- Loyalty 2.0 (Atomic Rewards in the form of tokens for attention and data)
- Martech 2.0 (unified stack that reduces integration hassles and brings data together for a holistic customer view)
- Velvet Rope Marketing (focus on Best Customers)
Email 2.0: This is the new and exciting possibility for the creation of a hotline to solve the attention recession problem. AMP (Accelerated Mobile Pages, a technology from Google) enables interactivity in email, eliminating the need for a clickthrough to a landing page. Brands can create mini-apps inside emails. Early campaigns done by Netcore customers have seen 3-8 times increase in conversion actions in AMP-powered emails. There is no downside to sending an AMP email: for those inboxes where AMP is not supported (Apple’s email client, for example), the regular email is shown. Email 2.0 Hotlines are the future of engagement. They bring WhatsApp-like interactivity (and in some cases, even better) into the inbox at a price point which is a fraction of WhatsApp – thus enabling massive scale and frequency. The friction in creation of AMP emails is being rapidly reduced with AMP editors, templates and agencies.
Loyalty 2.0: This is about enabling brands to offer micro-incentives (“Atomic Rewards”) to change user behaviour along multiple touchpoints (online and offline) in the customer journey. While brands have traditional (Loyalty 1.0) programs which offer points for transactions, there is no equivalent for the upstream (attention and data) and downstream (reviews, ratings, referrals). Web3 tokens (bridged with Web2 points) can address the limitations of Loyalty 1.0 programs (single brand, devaluation threat, expiry of points, non-transferrabilty, non-tradability, and limited redemption options, no gamification, no asset appreciation). With Loyalty 2.0 gamification tokens, marketers will finally be able to persuade their (Best) customers to do the next actions for CLV (customer lifetime value) maximisation – and thus take a giant step towards AdWaste reduction.
Martech 2.0: The past few years have seen marketers implement various opportunistic point solutions on their website and in their apps for marketing automation and journey orchestration. The multitude of solutions has created a suboptimal customer experience. It has fragmented data, rendered AI less effective and limited the availability of a unified customer view. What marketers now need to upgrade to is a Martech 2.0 solution which provides a single stack to do it all and provide a superior customer experience with differentiation for Best customers and thus drive more stickiness – and eventually transactions.
Velvet Rope Marketing: VRM is about focusing on the Best Customers, and directing the performance marketing budget to acquire and retain them. A focus on Best Customers can deliver disproportionately high returns on the money spent. The key here is to calculate CLV right and then follow it up by decoding the Best Customer Genome – what is common to Best Customers.
This quartet of disruptions (Email 2.0 Hotlines, Loyalty 2.0 Gamification Tokens, Martech 2.0 Unified Stack and Velvet Rope Marketing) is digital marketing’s game changer – eliminating AdWaste, building better customer relationships and experiences, increasing revenues, and driving profitability without any increase in the marketing budget. Finally, CMOs can dream of a utopian future where they become Chief Profitability Officers.
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Together
This then is the full picture of the future of digital marketing where a quartet of disruptions addresses the three discontents of rising CAC in digital messages, attention recession in push messages, and suboptimal experience on properties. The disruptions start by addressing the crux of the brand-customer relationship with Email 2.0 hotlines and move the conversion ever closer to customers. Loyalty 2.0 gamification tokens give marketers the ability to engineer shifts in user behaviour by redirecting the AdWaste spending towards Atomic Rewards. Martech 2.0’s unified stack ensures that the incoming traffic to the brand’s properties has a personalised experience high on relevance. A focus on Best Customers (for acquisition and retention) reduces AdWaste and increases revenues. Together, these innovations can double brand profits without an increase in marketing expenses.
There is another partnership at work. Netcore and MuCo are together working to make this world come alive. Netcore’s focus on Email 2.0 and Martech 2.0 combined with MuCo’s Loyalty 2.0 gamification tokens can bring this new future to life faster. This will also need partnerships – a constellation of companies which can fill gaps to ensure marketers can focus on retention, growth and superior outcomes rather than technology and gluing siloed solutions. One such partnership that Netcore has is with ProfitWheel which optimises ad spending budgets to redirect them towards Best Customers.
Over the past two years, I have written extensively on various aspects of this new universe. Like Disney’s Marvel Cinematic Universe, this is the Martech Profitability Universe! Without profits, brands will be forever challenged to deliver the right value to customers. For far too long, marketers handed over the keys of their customer relationships to Big Adtech. While it worked well initially, the result was that it became like a drug marketers could not resist – and it has proved very detrimental to the health of business profitability. This is what needs to change.
By cutting down on AdWaste, brands will reduce the clout and power of Big Adtech. $200 billion is being wasted – this is money which now can be shared between customer payments (in the form of tokens), next-gen martech solutions and an increase in brand profits. This creative destruction process via the ‘market’ can thus solve the problem of Big Adtech dominance in a better way rather than any judicial or regulatory interventions. The likes of Google and Meta play a crucial role in the ecosystem – new customer acquisition will always be needed. But the skewed budgets where 85-90% went on new customers leaving just 10-15% for existing customers can now finally be corrected leading to a balance in spending.
This, then, is marketing’s future. Earned Growth (a metric based on revenue growth from existing customers and new customers coming in via referrals) should be the North Star Metric for marketers. Email 2.0, Loyalty 2.0, Martech and Velvet Rope Marketing 2.0 are the four horsemen to lead marketers into this new world of exponential forever profitable growth.
