The Customer Acquisition Pricing Parade

"It’s important to get to know your customers and their needs and really listen to what’s important to them, rather than pitching what you think is important." – Kara Goldin, Founder & CEO of Hint 


The future of holding companies will be built around audiences, not industries.

Today, many of the biggest direct to consumer (DTC) and digitally native vertical brands (DNVBs) battle for the same affluent urban Millennials. Silicon Valley marches to the beat of three words: Growth. Growth. Growth. 

Billion dollar brands such as Jet.com, Bonobos, and Dollar Shave Club pioneered today's venture-backed brand-building trifecta: hyper-growth, quality product, and customer data. Fueled by the scale of Facebook and Google, these brands have instant global reach.

Flushed with scale-hungry investors and oceans of venture money, DNVBs go to war for the same customers on the same platforms (such as Facebook and Google). Customer acquisition costs soar as they fight for limited advertising space. As companies grow, so do costs of acquiring each additional customer.

 Customer acquisition costs are increasing exponentially.

Customer acquisition costs are increasing exponentially.

Demand for advertising space outpaces the supply of it, which drives up prices. Facebook and Google are offering additional advertising inventory.¹ In 2016, we didn't have ads between our Instagram stories, but today we do. Why? Because advertisers on Facebook and Instagram are happy when inventory expands and they can reach consumers. Since because Facebook commands the lion’s share of consumer attention and owns the real estate where they show ads, brands offer customers at higher and higher prices, as Mark Zuckerberg rakes in buckets of cash. 

The DNVB space wreaks of high customer acquisition costs and smells like a bubble. As Chamath Palihapitiya, the former VP of Growth at Facebook, and now the CEO of Social Capital, observed about $0.40 of every VC dollar raised goes straight to user acquisition:

"User acquisition and growth has become such an entrenched part of the Silicon Valley zeitgeist. Unfortunately, today’s massive venture-backed advertising, sales, and user acquisition playbook has morphed into one that champions growth at any cost.

We have higher salaries, higher rents, higher customer acquisition costs, Kind bars, and kombucha on tap!"

Competitive bids for the same inventory, addressing the same audience, drive up demand for the same real estate within a feed or a story, causing ad prices to skyrocket.

Advertising on Facebook has become 70% more expensive between 2017 and 2018, while ad spend on Facebook grew 40% during Q2 2018.

In the words of Warren Buffett, this ruthless arms race is like a parade: 

"One spectator, determined to get a better view, stands on their tiptoes. It works well initially until everyone else does the same. Then, the taxing effort of standing on your toes becomes table stakes to be able to see anything at all. Now, not only is any advantage squandered, but we’re all worse off than we were when we first started."

There’s the current state of customer acquisition — a parade of brands looking to acquire every single customer individually.

On the internet, where attention is bought and sold like a commodity, the scarce resource has shifted from attention to trust. As Morgan Housel wrote: 

“Marketing is increasingly cheap. Trust is increasingly expensive. 

Attracting eyeballs no longer sets you apart. Building trust among those who have their eyes on you, does. Getting people’s attention is no longer a skill. Keeping people’s attention is."

To decrease spending and increase profitability, the holding companies of tomorrow will shift their attention from controlling supply to controlling demand — from building around industries to building around audiences. 

Re-marketing to an existing customer is significantly cheaper than trying to persuade a first time customer to buy your product — sometimes nearly 90% cheaper.² As Ben Thompson has observed, we're shifting from a supply-driven world to a demand-driven world:

"The folks who win on the internet make the experience better. In the physical world, limited by scarcity, economic power comes from controlling supply; in the digital world, overwhelmed by abundance, economic power comes from controlling demand, and that control stems from a virtuous cycle that... accrues to the dominant player in a space.”

Companies who cater to the needs of passionate customers will benefit from lowered customer acquisition costs and higher lifetime value (LTV), reduced churn and increased loyalty. Once a paying customer is acquired, companies can cross-sell and up-sell them into different products, categories, and even brands. The fight to find that customer will be much easier leading to an increase in transaction volume. As they reduce friction in the payment process and increase customer loyalty, they'll accrue data behind customer cohorts leading to a customer-centric experience.

"Brands are irrelevant. The users are the brand. They are the CEO." – Emily Weiss, Founder of Glossier

Roughly 80% of Glossier's growth comes from peer-to-peer recommendations, and their main retail establishment generates more sales revenue per square foot than the average Apple store. 

Sales and marketing are the lifeblood of any organization. Unlike many of today's DNVB behemoths, their customer acquisition costs will decline as their balance sheets scale up and to the right. Instead of blowing cash on customer acquisition, DNVBs invest in brand experience to increase customer retention, loyalty, and peer-to-peer referral. Informed by data and dynamic feedback loops between customers and headquarters, brands like Hint and Glossier incorporate customer feedback and crowdsource brand extensions. 

Companies who cater to their customers and develop direct relationships with them, will own the future. 



Note: I co-wrote this post with Nik Sharma.

Footnotes

¹ There are a finite amount of places an ad can be shown. Think about this in the sense of billboards: there has to be a limited amount of billboards; just like that, there's only so many places the internet can host an advertisement.

² There are three kinds of marketing:

  1. Prospecting — Going after a whole new consumer entirely. They've never heard of your brand.

  2. Retargeting — Advertising to convert a customer who expressed interest, but didn't complete their transaction.

  3. Re-marketing — Advertising to your existing customer list to sell something else.