I’ll be the first to admit it: Facebook advertising played a big part in my startup’s rapid growth. So big in fact that in our first two years of operations, all other online advertising platforms combined did not provide as big a growth contribution to the business as Facebook singlehandedly did.
And yet, over the past nine months, I’ve been making every effort possible to divert our eight-figure annual marketing budget elsewhere. The reason for that is simple: Facebook is fostering an unsustainable bubble that is actively pushing startups, and any online-savvy business for that matter, away.
The evolution of Facebook advertising
When I started an e-commerce company as a broke student three years ago, Facebook was my knight in shining armor. In a capital-intensive business such as lingerie with sky-high minimum orders, tricky-sized inventory and lengthy lead times, our first investment dollars were directed towards product, leaving a shoestring budget to fuel growth.
In the pre-Facebook era, with no budget for TV, newspaper or radio advertising, this would have meant we had no feasible way to gain quality exposure at a large scale for years. The Facebook advertising platform changed the course of that fate: We could now bootstrap our marketing — and that was revolutionary.
Facebook offered a genuinely disruptive solution with three core strengths.
First, it was one of the only platforms that allowed you to accurately measure your results in real-time, letting startups do what they do best — be agile. Second, it provided a superior level of targeting. Want to advertise only to women aged 20-23, who live in Minneapolis, have an annual income of $40K, drive a Mini Cooper and listen to Kendrick Lamar? You got it. To put this in context, to this day, Twitter doesn’t even know the gender of its followers.
Third, and most importantly, combining real-time measurable results and superior targeting meant we could scale up quickly. Our marketing dollars on Facebook went a long way, and accurate targeting strategies on our end allowed our tiny budget to catapult the business to $1 million revenues in 2012.
By 2014, we’d spent over $10 million since inception on online marketing, raked in annual revenues in the double-digit millions, and raised $11.5 million in financing. And we were not alone – most rapidly growing startups were fueling their growth on Facebook.
It wasn’t long before big corporates followed the lead of the lean, agile startups and diverted big chunks of their budget to Facebook. The problem was, these companies had little to no knowledge of online advertising and were importing their old-world culture into the platform.
The first signal of corporate takeover was budget dumping. Like clockwork, at the end of each quarter, corporate behemoths would cast away their unused quarterly budgets on Facebook, artificially inflating prices. This year alone, our cost per click went up 180 percent from start to end of Q1, and the prices in the last days of March — a time of the year with no big-shopping-spree-inducing holidays — were similar to those of Valentine’s Day.
To add insult to injury, as all corporates were bombarding consumers at the same time with no good reason, conversion rates were down. So, not only are advertisers paying more but they’re getting less — irrational spending at its best.
The same cultures that contributed to making the old-world advertising platforms obsolete are now the new norm on Facebook. Think what would happen to any company whose top client is Uber and the next day it’s Con Edison. That’s what happened to Facebook overnight.
The surge of irrational bidding and the rise of the Facebook bubble
Inflation of Facebook prices isn’t an end-of-quarter anomaly but a yearlong ailment. According to Facebook’s Q4 2014 earning slides, its revenues in the U.S. have grown 54 percent from 4Q13 to 4Q14. Its revenues per advertiser in the U.S. have grown 24 percent in the same time period, indicating that roughly half of Facebook’s growth is due to advertisers paying more.
Facebook’s spin doctors attribute this to Facebook improving its platform, leading users to click more and advertisers to pay for the added clicks; and also claim that Facebook offers more accurate targeting, which advertisers should be willing to pay a premium for.
While factually correct, these answers only disclose half the truth. The other half — the one that Facebook’s spin doctors don’t share and corporates have not yet realized — is what’s indicating the rise of a bubble.
Yes, Facebook users are clicking more, and advertisers are paying for more clicks. But what are users really clicking on?
Facebook calculates its CPCs as cost per every single click the user makes, whether it’s a Like, a share, or a visit to the brand’s website. But in the world of direct-response advertising, where “engagement” is an obscure term (whose impact on either sales or brand awareness no one knows how to measure), Likes and shares are worth absolutely nothing.
This is how the real surge of Facebook prices is disguised: For us, Facebook CPCs — cost per any Facebook click — went up 50 percent from January 2014 to January 2015. But our real CPC value — cost per Facebook click to our website — went up by a whopping 127 percent in the same time period. That means that our real Facebook prices have more than doubled YoY, and a sizable chunk of that price increase is due to a service of Likes and shares valued at zero.
Large corporate brands are unaware that a hefty share of their Facebook spend is attributed to Likes and shares; newcomers and the biggest spenders on Facebook don’t fully realize what they’re paying for.
Same goes for Facebook’s targeting. Yes, Facebook offers superior targeting, but unless you’re running a narrow-niche business, the benefits of targeting have their limits. If I had a business selling on-demand $10K caviar jars that deliver only to Manhattan’s Upper East Side, I would be very excited by Facebook’s granular targeting. But the biggest spenders on Facebook are mass-market brands looking for mass-market exposure, and while they may have the option to target by specific neighborhoods, elementary schools or favorite books, they have no business reason to do so.
Facebook may be developing more granular targeting capabilities, but its biggest spenders don’t really need it. Big spenders on Facebook are paying a premium for a service they don’t use or need.
Today, with its 2014 $6 billion advertising revenues in the U.S. alone, Facebook is exhibiting all the alarming symptoms of a bubble: a service traded in high volumes at inflated and economically irrational prices.
Facebook should care about the online advertising exodus
With sky-high prices and diminishing ROIs, the lean, agile and online-savvy businesses that once embraced Facebook are beginning to flee from it.
My startup is no exception. In the absence of other online marketing channels that allow efficient targeting at scale, we were left looking for other mass-market exposure channels. As an entrepreneur launching an e-commerce startup selling purely online and on mobile, digital channels and online advertising are an integral part of our DNA. Like many other startups, we would test any online channel under the sun before we even looked in the direction of offline marketing.
But once the only genuinely effective mass-market online channel began demanding irrational prices, we had no other choice. We decided to dabble in the unfamiliar waters of TV campaigns.
Unlike Facebook, the TV entry ticket was incredibly high. While we could test any online campaign for $5,000 or less, we needed a cool million to do initial testing on TV. The outdated culture was entirely foreign to us, and our jaw dropped when we realized that some of the largest TV networks were sending over results exclusively by fax machines.
Nonetheless, we took the plunge and launched a national TV campaign on MTV, Bravo, Lifetime and other networks.
When the results were in, we had to rub our eyes to believe it: The CPAs on TV weren’t that far off from Facebook. If I needed any further proof of the Facebook bubble and its irrationally inflated prices, there it was: Acquiring new customers on Facebook with an expert online team, optimized spend and single-image creative was almost as expensive as a full-fledged TV campaign, with third-party agency fees, not-yet-optimized spending, and three different pricey video creatives.
In 2015, we have scaled back on our Facebook spend by almost two-thirds and plan to divert that budget into TV advertising. And we’re not alone. Other startups such as Birchbox, Dollar Shave Club and BaubleBar are going into TV, as well, and at least in our case, this is entirely at the expense of Facebook.
This is indeed true, and in the short term, Facebook won’t be sweating this trend. But in the long term, Facebook is more vulnerable than ever to competing online solutions from worthy rivals, such as Instagram with its beta version of clickable ads and Pinterest and Twitter teaming up with ad platforms.So why should Facebook care? Startups and other small businesses are still a captive audience; early-stage startups don’t have the big entry tickets for TV and later-stage startups won’t completely pull out of Facebook, but simply scale back. Also, startups were the “small fish” in the Facebook pond, and as long as Facebook had the big corporate spenders in the game throwing large budgets their way, they were golden.
And as more online-savvy business scale back on Facebook, large corporates will learn and do what they do best — follow the lead of the lean and agile. Facebook can’t forever rely on not having worthy online competition or on its largest spenders remaining blind. Sooner or later, bubbles burst.