Outbound gets expensive as you scale
Due to their low barriers to entry, outbound channels are attractive places to start. But this also makes them extremely competitive and expensive. As you scale, targeting quality also declines: you start off by targeting your ideal target audience, but scaling up forces you to incrementally widen your audience... leading to lower quality traffic.
Ultimately, outbound channels allow companies to scale fast, but at a cost that eats away virtually all their margins. PPC bidding is designed to allow advertisers to pay exactly the maximum of what they can afford.
Tips
- Be aware that as you increase your daily ad spend on a platform, costs typically go up. When you start, the platform will hone in on advertising only to your most ideal users, but as you scale it needs to target not only the ideal users, but increasingly larger groups of less-than-ideal users, too.
- In addition to the above, the algorithms need to bid more aggressively to fully spend your daily budget every day. This also increases ad spend as you scale.
- Finally, larger volumes of advertising lead to ad fatigue — the fact that the same users see your ads multiple times, and get tired of them. This leads to lower performance. It is thus important to rotate your ad creatives to reduce ad fatigue.
- The first way to fight rising costs, is to continuously optimise your ads, to find better concepts and better variations that perform better.
- Second way to fight rising costs, is to invest in analytics to get better and more granular about attribution, and help platforms find the audience segments that are most profitable for you to target.
- The final — and most structural — way to fight rising costs, is to increase the lifetime value of the traffic you generate. Wise words from Dan Kennedy: “Whoever can spend the most to acquire a customer, wins”.
- Big companies aren’t very interested in advertising on small platforms, because it doesn’t scale. Smaller players can sometimes take advantage of that. To name a few big-but-not-massive options: Reddit, Quora, Pinterest, Twitter, Medium, Gmail, etc.
In Practice
Casper exploded onto the scene in 2014 with their innovative, direct-to-consumer mattresses. They relied heavily on Facebook ads to acquire customers. It worked exceptionally well: in 2015 Casper spent $50,000 per month on Facebook ads, at a cost of $75 per acquired customer. As their advertising budget grew to over $5 million per month (!!) by 2018, costs ballooned out of control. Now acquiring a customer cost $450 - a 6x increase!
Casper had saturated their core demographic on Facebook. The platform's algorithm began showing their ads to peripheral audiences, which convert at much lower rates. On top of that, existing customers suffered from ad fatigue after seeing the same creatives repeatedly.
Casper fought back by diversifying beyond Facebook, testing out new platforms like Hulu, Pinterest and podcast ads. They also opened retail stores, while narrowing online targeting to their ideal buyer personas only.
Pair with
- Andrew Chen’s “Law of Shitty Clickthroughs”
