Member Exclusive   /   April 24, 2020

Lower advertising costs present a double-edged sword for DTC brands

In some ways, it’s starting to feel like the early days of the direct-to-consumer boom all over again.

A startup’s website is once again its most important sales channel, as stores remain closed. Businesses are having to operate with as small of a team as possible. And Facebook is once again a cheap place to advertise.

Over the past couple of years, the constant refrain has been that DTC startups need to rely less on acquiring customers through Facebook. While some startups like Warby Parker and Hubble Contacts were able to acquire customers cheaply on Facebook in their early days, as more companies started advertising on the platform, Facebook advertising costs started to rise. Not only was it getting more expensive to acquire new customers, but many companies also realized that these customers weren’t spending as much with the brand as their initial projections had showed.

Now, as more companies are dramatically slashing their advertising budgets in the wake of the coronavirus, Facebook is becoming less crowded. Ranjan Roy, head of content for lingerie brand Adore Me, said that CPMs (cost per thousand impressions) for the brand have fallen 26%. “It seems like the perfect situation for an advertiser,” he said.

But, what’s a dream scenario for an advertiser isn’t necessarily the same one for a company that wants to grow sustainably. “Even if customers are cheaper to acquire right now, would they be kind of valuable and profitable in the long term — that’s the hardest thing to understand,” Roy said.

DTC brands need to keep a couple of things in mind before rushing to take advantage of cheap advertising costs right now. For one, whether or not they should spend more on Facebook ads right now depends on how much runway they have. Second, shoppers are behaving very differently right now, and so companies can’t assume that any previous projections they had showing that spending X on Facebook will typically bring in Y in revenue will hold.

“We are seeing some nice attractiveness in terms of ad spend and efficiency in ad spend, but we’re also seeing conversion drops,” Nate Checketts, CEO of Rhone told me last week.  “We’re looking at every single channel anew on a week-to-week basis.”

Roy said for the month of April, Adore Me doubled its advertising spend compared to the same period last year, because the company wanted to take advantage of lower advertising costs and felt that it was in a good position financially to do so. So far, revenue in April is up 57% compared to this time last year. But, a large part of that was due to the fact that Adore Me saw a 110% year-over-year increase on April 15 and 16 — the day that many Americans received their stimulus checks.

In order to figure out if Adore Me’s increased advertising spend is paying off, Roy said that the company is looking at its Net Promoter Scores, how many first-time customers are requesting returns, and how many are converting from making a one-off purchase to paying for Adore Me’s membership model.

“Even if customers are cheaper to acquire right now, would they be kind of valuable and profitable in the long term?” Roy said. “That’s the hardest thing to understand.” He said “that is very much up for debate day-to-day,” how much Adore Me will continue spend on advertising in May, but that “it would be safe to say we are not increasing any more in May.”

And, just because brands are seeing a short-term opportunity on Facebook, that does not mean that they should suddenly give up on what long-term has proven to be the most valuable customer acquisition strategy for them long-term — acquiring customers organically. Otherwise, companies risk creating yet another cycle of growth that they ultimately can’t sustain, as highly publicized, venture-backed brands like Outdoor Voices found out this year.

“When I look at some of my companies that are doing really well on DTC, they have a strong community component,” Matt Higgins, CEO of RSE Ventures said yesterday during a talk for ModernRetail+ subscribers. “You will be in a much stronger position if you can go ahead and build a strong passionate community around you that you can convert down the road.”

Lessons from year one

This week, DTC cereal brand Magic Spoon celebrated its first anniversary with a limited-edition birthday cake flavor. Co-founders Gabi Lewis and Greg Sewitz spoke with Modern Retail about lessons from their first year in business.

  • For a CPG brand, it is critically important to get taste and presentation right. Magic Spoon made a few changes to its product and packaging a year in, lessons the company gleaned from cold-calling as many of its subscribers as possible. Magic Spoon changed its packaging to note that it has zero grams of sugar, after finding out that was more important to customers than they thought (the packaging previously called out that the cereal had 12 grams of protein and 3 grams of net carbs). The brand has also reduced the amount of stevia in its cereals, and changed oils to make the cereal lower in saturated fat since launching.
  • Magic Spoon has relied on influencer marketing to help acquire new customers, but the company doesn’t just pay influencers to promote products. Some influencers have also become investors, like celebrity health coach Kelly LeVeque and Elana Amsterdam, who runs a gluten-free, paleo-friendly cooking site. “The customer didn’t see them as just an influencer that’s hawking a new product and doesn’t really care about it, but actually saw someone that they’re looking to for nutritional advice or whatever it might be, and they actually believe that person truly likes the Magic Spoon product.,” Lewis said. “That was incredibly helpful for our early success in the first couple of months.”
  • Lewis said that Magic Spoon will remain a direct-to-consumer cereal brand for the foreseeable future. He said that within the next 2-5 years roughly, Magic Spoon wants to start selling through traditional retail channels. “I think because of how big the cereal category is, there’s not a lot of reason to distract yourself with other product categories,” Lewis said. “There’s a lot of work we can do before we can even consider moving beyond cereal.”
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