The End of Facebook as a Marketing Plan

Only a few years ago, the thought of running a brand and attracting customers purely through social media channels was not only innovative, but brave. Unfortunately, times have changed, and pouring money into Facebook has become both unimaginative and expensive.

According to a report from Digiday, DTC brands are pulling back on their Facebook ad spend, some shifting as much as 30 percent of their spend away from the platform. Brands are moving to brick and mortar retail spaces, billboards, and TV ads, in a reverse of trends, seeking lower costs per impression (CPM).

One of the reasons that Facebook has become super competitive, and less attractive to DTC brands, is that everyone from Johnson & Johnson to Manscaped has poured cash into look-a-like segments on Facebook’s limited ad real-estate. This has driven up prices and lowered the value of the placements as the feed has become cluttered for both advertisers and users.

It doesn’t take an economics PhD to understand that prices will continue to escalate the more money is placed into social media advertising campaigns. Further, those same marketplace dynamics demonstrate why a company can’t rely on scaling their growth through spending on Facebook, as the marginal cost of acquiring customers will continue to scale alongside a company’s spend rate.

So, although a start-up may tell an exciting early story of $14/CAC on Facebook, the story almost always ends with over $100 acquisition costs on the channel by the time customer growth hits meaningful numbers.

An easy way to understand this phenomenon is that Facebook is pretty good (actually really damn good) at matching businesses with the customers most likely to buy their product. The customers that require the least amount of prodding, touches, or discounts are the first ones that will be surfaced the advertisement (and the first ones to click through and purchase). From that point, it’s a game of how much a business is willing to spend to keep surfacing the ads to the next, marginal customer. The marketer can tighten the funnel by upgrading the checkout process or creating better landing pages, but there is only so much room before the unstoppable force of customer profile vs spend catches up to them.

According to Andrew Dudum, the CEO of Hims, in a podcast interview on The 20-Minute VC the best way to combat this phenomenon is for a business to create its own ad inventory, instead of bidding for it. Andrew promotes the idea of finding places where customers are located and creating meaningful interactions with them there. For instance, his company, Hims, a men’s wellness and personal care pharmacy, has created ad space in bathroom stalls that were previously ad-free. These proprietary channels enable a company to treat ads like an oil well, testing for value, then extracting all of the value possible before moving on to the next idea. This method takes more work, but in the long run provides costs that are much more palatable.

At Brand Foundry, we won’t invest in a company based on their current customer acquisition costs (CAC), especially those that are heavily weighted with Facebook ad spend. That doesn’t mean we don’t think that past CAC is a solid indicator of a company’s market viability, nor that we don’t advocate for our portfolio companies to use Facebook as a part of their early growth strategy. Instead, it means that we point our founders towards developing creative methods of reaching their customers, when and where the customer is most receptive to their message. Through these channels, we try to model a marginal CAC — what it costs to acquire the next incremental set of customers- that our capital will help the business unlock.

Most importantly, we acknowledge and focus our investment and strategic support around the only truly scalable form of advertisement: having such a great product that people can’t get enough of it and won’t quit talking about it either.

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We invest in early stage companies that emerge into the brands you can’t live without.

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