Digital customer wars and ad price boom

As more brands chase customers online in hopes of persuading them to buy their products, the cost of digital advertising and customer acquisition is skyrocketing. Darpan Sanghvi, founder of The Good Glamm Group which owns a handful of sustainable direct-to-consumer beauty brands, unequivocally states that digital advertising costs have soared by around 50% in the markets over the past 18 months. “The cost of driving traffic to your direct-to-consumer (D2C) website has also jumped 25% because it’s powered by Google and Facebook,” Sanghvi said, explaining that it has become very expensive to to be seen or to sell online.

Himanshu Arora, co-founder of the digital agency Social Panga, confirms the trend. He attributes the skyrocketing cost of customer acquisition to the more recent transformation of the digital ecosystem. Five or six years ago, only tech or new-age brands and online businesses such as MakeMyTrip or Trivago used digital media to advertise, he said. Adoption of digital advertising has been slow, but covid-19 has come, forcing brands and consumers to go online. The launch of D2C or Internet first brands across all product categories has seen an explosion, Arora said.

The free availability of capital for startups meant they could burn money to acquire customers. “With many brands chasing growth at all costs, digital advertising rates have skyrocketed,” said Shankar Prasad, founder and CEO of vegan beauty brand D2C Plum. Additionally, as shoppers moved online, traditional brands also increased their spending on digital media.

Consequently, demand began to exceed supply, causing digital media inflation. Google and Facebook, which auction advertising on their platforms, have seen the bidding wars escalate, driving up costs for anyone who wants to advertise or sell online.

Pratik Gupta, co-founder of Zoo Media, owner of creative digital agency FoxyMoron, says far too many brands in one category are chasing a limited number of clients, driving up costs. He believes the online customer base hasn’t grown much after the initial lockdown-related spikes. “In theory, my cost of acquiring customers for a particular category in a large market has gone from Rs50 to 125. It has increased because the number of people who regularly buy from this market has not exploded,” he said.

Data on actual online shoppers in India is hard to come by, although several reports claim it is significant. A Statista report estimates India’s Internet users at 658 million, with an active e-commerce penetration of almost 77%.

However, based on experience, Plum’s Prasad said his estimates were more modest. The customer base, anyone who has ever made purchases online, is closer to 150 million. “That even includes those who maybe just bought a train ticket once,” he explained. Fairly regular online shoppers could be closer to 100 million. “However, the number of avid online shoppers is well below 100 million,” he said.

Even go-to beauty marketplace Nykaa, for example, averaged around 21 million monthly unique visitors in FY22, according to the company and a report by Jefferies.

Last but not least, digital advertising costs will rise further as more and more platforms (Apple and Google, for starters) move away from cookies to protect customer privacy. A cookie is perhaps the easiest way to obtain information about a customer.

If you visit a publisher’s website, your browser’s cookie tracks you and reports your Internet behavior to the publisher, FoxyMoron’s Gupta explained. “Over a period of time, based on your browsing history, the cookie builds a personality of you. Publishers and platforms share this data with advertisers for better targeting. However, as this tracking becomes rare, this data will become more expensive,” he said.

Digital advertising will become inefficient and more expensive if all cookies are removed, Prasad said.

Digital marketing experts have differing opinions on whether digital advertising costs will drop in the near future. As startup funding dries up, there will also be a correction in digital marketing costs, Prasad said.

However, Arora doesn’t see those costs plateauing anytime soon. He cites the example of Indian Premier League digital media rights fetching more than TV rights at a recent auction. Digital consumption will only increase. “What brands can do is stay focused and stop leaks,” he said.

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