The virtuous cycle of the TV impact on Digital Startups
By Toni Moreno Planas, Managing Director at Ad4Ventures Spain (Mediaset Group).
Ad4Ventures is the venture capital arm of Mediaset Group (leading free to air television broadcaster in Spain and Italy), focused on television media for equity deals. Ad4ventures has become the largest media for equity player in Southern Europe.
The main challenge we find every time we talk to digital startups for the first time is to make them see that there is life beyond the LTV (life time value) versus CAC (customer acquisition cost) formula. A frequent question is about if their CPV (cost per visit) or CPI (cost per install) is 1,27€ with SEM and 1,42€ with Facebook ads, what would the cost be with television. Despite of the many efforts of industry experts to come up with attribution models, the answer to that is not easy and that’s the reason we came up with our “virtuous cycle of the TV impact” theory that I will expose in this post, which broadly summarizes our learnings of working hand on hand with digital startups, studying and optimizing their TV campaigns over the last few years.
To set up the scene, let’s start with a summary of the way of analyzing a digital startup:
Customer Acquisition Cost (CAC):
This metric is the result of the cost to attract users to your platform for the first time (Cost Per Visit — CPV or Cost Per Install- CPI) and your ability to convert them into paying customers (First Time Buyers — FTB). Your blended CPV/CPI will obviously depend on traffic acquired from various marketing channels and organic users (who come for free either from “word of mouth” or other offline initiatives).
Life Time Value (LTV):
This metric will be the result of multiplying the unit margin contribution of one transaction by the expected number of times that your user is expected to transact over his life time as a customer (repetition profile — cohorts analysis).
In case LTV > CAC, i.e. if the company is marketing ROI positive, the startup has reached a very relevant milestone suggesting it can become viable and therefore, may have access to proper funding.
The Company will then have to scale up in a way that this contribution margin can cover for IT and development costs, expenses to acquire supply (in marketplaces), sales team and other structure costs to reach profitability.
The Key Metrics Chart:
In our example, despite of the positive marketing ROI, the Business will need to scale considerably to reach breakeven.
This fact needs to take into consideration potential diminishing returns of performance marketing channels when you scale up, the risk of competitors gaining market share with more aggressive marketing strategies or the expected losses to be generated until breakeven is reached.
How to measure TV advertising performance on a digital business:
One of the “revolutionary” recommendations that we bring to the table when talking to online startups is not only how to look for the impact but also, when to look for it. The success of a campaign needs to be measured once the campaign is finalized, i.e. the “CPV/CPI per channel approach” would be short sighted as you would be missing the main part of the real impact. You will see an activity peak during the campaign, but what really counts for the business value creation is what remains thereafter.
Impact of Television Advertising on Digital Businesses:
Customer Acquisition Cost:
As mentioned before, during the TV campaign we will have a large traffic peak, but let us concentrate on the sustainable impact on the key business metrics once the campaign is over.
· As we can see with some examples in our post (“Impact of TV advertising on Digital Startups: Some Examples”), brand awareness will increase the weight of organic traffic or branded search, reducing the dependence on performance marketing and therefore the blended acquisition cost.
· On top of that, the efficiency of online/mobile performance marketing normally improves as SEO positioning gets better (as you become more relevant for Google searches), CTR (click-through-rate) increases in relevant searches (as you are known to the user) or in case of mobile apps, the fact of being at the top rankings of the app stores (due to a large number of downloads within the campaign weeks) generates snowball effects. All of this should result in lower performance marketing unit acquisition costs.
· Still today, if a product is seen on television, people gain trust on the product which becomes more credible. This is important for any internet related business, given the lack of confidence that the over-fragmentation of the web and lack of knowledge on who is behind each site generate on the user. This fact becomes more relevant in sensitive areas like money and health, affecting more in particular fintech, e-health or businesses with high purchase tickets. Credibility impacts the business in a tangible way by improving conversion rates, reducing therefore the customer acquisition cost.
Obviously, the impact on the business’ key metrics after the campaign will depend on the size of the advertising effort. If we assume, as an example, a 5 percentage point improvement in organic traffic, 5% better performance acquisition and a 5% improvement in conversion rates, the overall impact on the blended CAC becomes relevant.
Life Time Value:
· A relevant concept that is key to the success of a startup is the scale. We will comment on that later but, larger sale volumes in an ecommerce result in better negotiation power with suppliers which should result in lower product acquisition costs, leading to the potential for either higher contribution margins or alternatively, lower pricing that could help boost sales volumes.
· Another aspect that we have observed is that historical users (those from before launching the campaign) tend to consume more than before as the TV effort works as a retargeting or repetition marketing tool, reactivating passive consumers, improving the old and new cohorts.
We can observe in the theoretical and simplified example the way 5% improvements can derive in a relevant improvement in the sustainable LTV.
Based on this, the actual way of looking at television advertising in terms of timing would better be:
When analyzing the impact of TV advertising, although at a first sight, a higher direct cost of acquisition at the time of the campaign may lead to believe that the use of capital was inefficient. If we take into consideration “the day after”, factoring the sustainable improvement in CAC and LTV as described above, this initial impression may turn into a very positive view of the outcome.
Other relevant impacts:
- In a marketplace, the acquisition of supply/offer (restaurants, lawyers, professionals, etc) may require large budgets. A television campaign impacts both sides of the market, being of particular relevance the reaction of the supply side actors who proactively contact the platform to subscribe once seen on television. The improvement in the variety of supply should lead to a more attractive product offering and therefore better conversion rates.
- It also helps sales teams in their commercial efforts to convert leads into sales or in cold calls to potential customers, as it becomes more likely that the potential customer knows your business which is perceived as more reliable. This should result in an improvement of the sales team’s productivity.
- Last but not least, we talk about “Scale”. This is probably one of the most relevant aspects to consider. As we mentioned before, scale allows us to improve our negotiation power with suppliers what should facilitate access to better product catalog and price management, leading thus to better conversion rates.
Scale accelerates the business’ path to breakeven (if we are there in 6 months rather than in 18 months, we save many months of cash burn and uncertainty). On top of that, scale helps the business have the ability to become market leader (becoming very valuable for a potential exit), creating market entry barriers for potential new or foreign competitors.
All of the previous lead us to talk about the virtuous cycle of television advertising in digital businesses, as a relevant campaign (note that size matters…), may have a transformational impact on the business affecting, to a higher or lesser extent, all key metrics in a sustainable way (in orange below).
Looking at the impact of a TV advertising effort over a longer period of time, it may result in the capacity of the company to scale up faster, reaching breakeven in a shorter period of time (i.e. covering for all other non-marketing operating expenses), while improving unit marketing ROI in a sustainable way and reaching a strong market position.
Many have been looking for the holy grail of an attribution model that would allow online marketing experts predict what to expect from television in order to compare with the performance marketing channels. While proxies can be done, the complexity of factoring all these variables, together with the type of creativity of the spot used or the type of product, make us be pessimistic about any econometric model (even if sophisticated).
Television budget should not replace online budgets but complement them so that the impact of the overall marketing budget is magnified over time.
I intentionally avoided talking about brand awareness until the very last sentence, as it tends to be presented or understood as an unmeasurable intangible asset that requires blind faith to believe in it. In the end, all that I have been talking about is branding, but proving that it can be very tangible. It is just a matter of where to look at and the time frame of its impact.
Feel free to contact us on contacts@Ad4Ventures.com and we will be happy to comment your case and give you our views.
