Paid Marketing: What They Don’t Tell You About the Addiction to Paid Marketing

Paid Marketing can be very effective. Starting on Day One of opening an account with either of the platforms can unlock a flood of traffic and attention. It can also be cheap hits creating an addition to fast, unsustainable growth.

One issue remains. It’s too easy to go overboard. It’s too easy to get addicted to the high of flooding the site and seeing orders pour in when it’s working well. When it’s going the other way higher costs per order lower marginal impact and decreasing effectiveness as you burn through audiences with the same creative.

Scale effects mostly work against you in paid marketing. The longer your campaigns run, the less effective they become” — Andrew Chen

Paid Marketing is also unsustainable on its own.  Other channels must be built at the same time to ensure growth is both healthy and sustainable. It’s easy to test within paid marketing to find slightly more efficient. But finding a balance between paid and organic channels allows startups to find the optimal growth strategy to carry them into a stronger future.

Back a few years ago, high-growth e-commerce startups struggled after getting high on paid marketing. Reporting on Bonobos growth, Business Insider noted “Gilt Groupe has gone sideways. Fab has crashed and burned. Zulily soared then sank on the public markets before selling.” Around this time, Bonobos was spending 25% of revenue on paid marketing. Bonobos dropped marketing down to 4% of revenues. Bonobos sold to Wal-Mart for $310M.

“Addiction to paid marketing can get you into a local maximum. It’s much harder to fix the underlying issues – creating real moats, product differentiation, doing deeper adtech integrations.” — Andrew Chen

What’s the right balance? How do companies find a healthy mix of channels to fuel growth? After experiencing first hand the challenge of finding that balance and attempting to convince a company to invest more into the organic side of the equation, I tried to find a data-driven answer. After researching 20 companies to find the ideal marketing mix to a healthy approach to customer acquisition, below shows opportunities for more sustainable acquisition plans.

A Study on Marketing Channels

Looking across 252 different digitally native startups, this study dove into the marketing strategies used. Using SimilarWeb to uncover where startups are investing in marketing. From there, the study also focused on startups with Venture Capital funding compared to companies without Venture funds to compare the marketing strategies used by startups funded by VCs vs those without funds.

After studying the startups and the marketing strategies they turn to, a few trends emerge. Email isn’t dead. Organic search is still a core pillar of growth. Referrals aren’t insignificant. For some startups, Display ads drive more traffic than social.

Venture Funded Startups Rely on Paid

 

The 157 Venture-funded startups in this study rely on paid channels consistently more than their non-VC funded counterparts. Paid search, display and direct. In this case, Direct, in this case, is assumed to be from non-digital paid marketing. Startups lean on out-of-home, direct mail, podcast sponsorships. This assumption remains difficult to prove without the ability to compare all marketing budgets across all 252 startups.

Non-venture backed startups might pursue a healthier approach to marketing finding more sources of revenue without the cost associated with paid channels. Leaning on Email, Referral, and Organic search significantly more than VC backed counterparts is partially due to the necessity, but set the company up to have a growth engine without having the ongoing cost of paid marketing channels like paid search.

Email Marketing: The Channel that Won’t Die

Email doesn’t seem to be going anywhere anytime soon. From the start of the Internet, Email continues to be favored by consumers and businesses sending out newsletters, promos, and offers. For startups, email offers a reliable, inexpensive channel to re-engage, acquire customers more efficiently than most paid channels. It’s a list of people (not cookies) interested in hearing from your company. It’s also scalable with costs per email sent generally falling. Which is why some of the most sustainable acquisition plans still involve reliance on email.

In this study, the average percentage of traffic startups saw with email was 3.06%. The max was 15.24%. It’s sigificant that some startups are still able dominate email and consistently generate a flood of traffic to the site using email. Things like inbox retargeting, quizes, stories and connecting the brand to the people behind the scence are some of the strategies allowing some startups to dominate an inexpensive channel.

Organic Search: The Little Engine that Could

SEO is dead. Or is it? After changes to the algorithm, Google now accounts for more traffic than Facebook to publisher sites. And while startups can’t always hire the editorial talent to create content worth ranking, in this study, Organic Search remains a large driver of traffic for startups. On average, 30.29% of traffic came from Organic Search. SEO continues to play a dominant role in a healthy balance of acquisition channels to fuel growth.

Referrals: The Rise of Comtent and the New Rules for PR

With companies like Skimlinks and Viglink, publishers are creating content editors. These new verticles are generating 15% of a publishers total revenue. Startups like Brooklinen and Parachute Home are getting huge story placement on site like Business Insider’s Insider Picks team. It’s the rise of Comtent. Commerce Content where publishers cover new products and new companies. It’s often easier to get a story from a commerce editor than an organic story in massive publications like Business Insider.

Display Ads: The Misunderstood Tool for Traffic and Revenue

And the largest opportunity for paid marketing might be what SimilarWeb refers to as ‘display ads.’ Looking deeper, the Display Ads source of traffic used by the higher growth startups remains Content Marketing (ie, Taboola, Outbrain, and RevContent).

Social: Audience Approaches to Re-Energize Paid Social

Costs on Facebook aren’t cheap anymore. Facebook is almost as competitive as Google with the marketplace of advertisers. The cost increases, less effectiveness has caused some brands to abandon Facebook or lessen the reliance on Facebook. Digiday spoke with “10 direct-to-consumer companies, and all of them report their marketing mix has de-emphasized Facebook for other digital alternatives.” Other brands, however, are using audience segments to create more efficient programs with Facebook to combat the inflated CPM costs.

Paid Search: Audience First, Keywords Second

The paid search world has undergone a dramatic change away from simply targeting buckets of keywords to an audience based approach. It’s people searching those terms. Now Google Ads allows advertisers to use audience data to inform how the targeting is set up for those keywords. It’s a startup’s best weapon against an insanely competitive market.

Paid to Organic: Find Balance

Andrew Chen recommends keeping paid marketing around 30-40% of the funnel. Word of mouth, content marketing, direct, email, organic search, and testing emerging channels need to make up the rest. In this study, Chen’s recommendation comes in higher than average.

After studying 252 successful consumer startups in verticals from travel, subscription e-commerce to retail e-commerce, the average organic traffic rate is 30.29%. Direct traffic is a blend between the brand, word of mouth, and paid channel lag. The average for direct stands at 39.09%. Finally, that gives Paid Marketing the smallest percentage of traffic across 252 different startups. Paid channels average comes in at 27.58%.

Reducing the dependence on paid channels to build out other channels gives companies more stability and a healthier approach to growth. Building up referral systems, a brand position, as well as building out an Organic search strategy gives brands the healthiest approach to customer acquisition. Instead of blending CAC across channels, channel CAC allows brands to give proper weights to marketing acquisition costs.

What’s the Fix for Paid Addiction?

On top of keeping paid down to less than 50% of acquisition. Conversion Rate optimization fuels growth from both paid and organic channels. It’s the edge companies like Amazon continue to use in competitive spaces. It’s an ability to reduce channel CAC while growing overall marketing spend makes CRO the activity companies can’t afford to overlook. CRO could get as much effort as paid efforts for a never-ending cycle of increasing efficiency.

Conversion Rate Experts Chart on the Virtuous Cycle of CRO

On top of using CRO to battle increasing costs, decreasing effectivness. Brands can revisit relance on paid channels to balance the percentage of traffic from paid channels, while putting more resources to organic/direct channels like SEO, Referal programs, and brand positioning.