The decade-long boom in the online advertising business of pay-per-click (aka performance marketing) appears to be fading. That’s the message implicit in the latest disappointing financial reports from the marquee platforms — Alphabet (Google) and Meta (Facebook).
Alphabet recently reported weaker-than-expected third quarter earnings and hinted that a turnaround was not in sight. Meta reported that ad demand was weak and its average ad price fell 18% year-over-year. In a CNN report, analyst Evelyn Mitchell called the Google news, “a bad omen for digital advertising at large.”
The weakening economy was a factor, as was e-commerce’s flattening share of the consumer wallet. But the principal problem facing the ad platforms is the fact that digital advertising has gotten expensive. By some measures, customer acquisition costs in the consumer space have risen by about 60% over the past decade. Clicking on ad links is no longer an efficient way to “buy” customers.
Retailers like Walmart, Target, and CVS have responded by going into the advertising business, competing with the majors by offering “sponsored” ad space on their websites for vendor merchandise. Amazon was a leader in that category and by 2021 its ad business was generating annual revenue of $31 billion, a 100% increase in one year.
What caught our attention recently was the announcement by Airbnb that it was having success with a new strategy — cutting its performance ad spend and investing instead in brand marketing.
According to a report in The Wall Street Journal, in 2020 the company cut its sales and marketing expenses by 28% and has been investing instead in “broad marketing campaigns and public relations to build its brand.”
On a call with analysts, Airbnb CEO Brian Chesky said the company is focusing its ad spend on categories (home style, proximity to popular activities), and on customer and host concerns, like cancellations, booking mix-ups, and insurance.
It sounds new, but it really isn’t. Building brand and customer loyalty is what venerable companies like Ralph Lauren and Disney have been doing forever.
L.L. Bean, which was once famous for its return policy — any product, any time, for any reason, no receipt required — last year posted its highest-ever annual revenue of $1.8 billion.
Airbnb’s Chesky reported that the company still uses performance marketing for specific goals, “as more of a way to laser in to balance supply and demand rather than a way to just purchase a large amount of customers.”
Translation: The company is building a customer base that is more personalized and creates an atmosphere of trust. That is values marketing and it's what our research at First Insight shows the younger generations look for — shared values.
It’s worth noting that in the recent election cycle, some campaigns claimed success by taking a similar tack, cutting back on online advertising in favor of boots on the ground. The more things change...