How has the cost of social media advertising affected direct-to-consumer companies? 9
How has the increase in social media advertising costs impacted direct-to-consumer businesses?
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The cost of social media advertising has significantly impacted direct-to-consumer companies by increasing their customer acquisition costs. As more companies entered the market and competition for ad space grew, platforms like Facebook, Google, and YouTube raised their advertising rates. This made marketing more expensive and eroded the profitability of many DTC companies, as they had to spend more to maintain visibility and attract customers.
As someone who reads things, I’ve seen a lot of d2c marketing. Raycons, Magic Spoon, Factor and so so so many others “sponsoring” content. I’ve grown to HATE d2c companies because it’s so pervasive. If I read 7 pieces of content made at around the same time, I’m going to see 7 people who didn’t, don’t, and wouldn’t pay for Magic Spoon try to convince me to buy it. And if I’m interested, I’ll try a direct competitor first.
The increase in paid advertising after 2021 killed a lot of online brands. You can no longer sell a product online for under $30 profitably since the acquisition cost is far greater than $30. This was mainly because of the apple iOS update in 2021 that cut from users browsing data. We had to shut down our brand that was on pace to do $20mm yearly revenue simply because advertising was unaffordable as soon as the iOS update happened.
You forgot to mention one of the main headwinds for DTCs: Apple's 2021 iOS 14.5 updated that prevented from tracking customers. No longer able to track customers, it immediately broke the business model for targeting consumers via social ads.
A look at any of their budgets makes the issue obvious; Marketing is almost always the biggest expense, sometimes more than the actual product AND shipping. And marketing often makes absolutely dumb money with poor metrics about return on the investment.
There is no need to pay for advertising to drive customers to your products. Paid advertising is a thing of the past and a waste of money. Especially when the market is saturated with the same or similar products. Businesses can save money and still get sells without paying for advertising.
Customer exeprience matters and stores are innovating with online value beyond price. At the same time, online advertising costs are a high digital rent eroding old DTC cost advantages. Squeezed on both ends, the pandemic DTC retail bubble is deflating fast.
When a whole business is dependent on ad-spend, it isn't really a real business. All these D2Cs when south when ad costs started spiking. They also realized that you cap out of market share quite fast and you end up having to go down the path of brick-and-motor and thus have to struggle with all the pain and logistics of traditional retail. IMO, I still think niche D2C with quality premium products that focuses on affiliate marketing can still win in 2024. But it has to be the type of company that is okay with reaching a certain level of growth and maintaining that. Trying to reach for the sky and IPO land isn't a real. These D2C companies are not designed well for the la-la-land of VC and IPOs.
This is exactly what happened to my D2C startup last year, the CAC cost of advertising was so prohibitively high that we had to shut down. The greed of companies like Google and Meta entrenches the market lead of existing companies and squashes innovation.