A major pitfall that E-commerce startups face is over-reliance on paid marketing these days. In relying on paid marketing, they are masking the true cost of customer acquisition as a result. These startups are forgetting the fact that as the business grows, it becomes not only expensive but also becomes hard to track.
One of the familiar stories that you see a lot in the market is this: a startup launches a new product, gets a good spike in sales, and then it suddenly dies out. Since the product becomes less popular, it might be necessary for the startup to spend some money to grow. It will, in turn, increase the market spend. While it is profitable, the startup ends up spending more money, cutting into the bottom line.
Many startups then turn to venture capitalists (VCs) to provide them with some additional money. While it looks like party time, the top line can end up hitting the roof. The payment period might go from 9 to 12 months and sometimes even more. While the numbers look good on the ground unit economics looks profitable, it’s not once you factor in staff and operational costs. If there is no growth in the top line, it is virtually impossible for the startup to get more investment. Since the budgets shrink, the team might end up laying off some of their employees.
It does not mean slower growth is necessarily the right thing; it only implies that it’s time to rework the growth strategy. You might end up planning on doing something else which you want to power using paid marketing but rely on a different overall strategy. These things might be as simple as getting users to subscribe or get a premium account.
You might end up doing something else to increase your growth and do irrelevant stuff which might lead you to bankruptcy. Since these things happen a lot in this industry, you can see here a pattern. Now, this is commonly known as Paid Marketing Local Max.
One needs to understand the fact that paid marketing is something that is very difficult to expand if you want it to be your main channel. It primarily depends on a few of the significant external forces like the competing companies and marketing platforms. If things become entirely unsustainable, the leadership team’s psychology also might play a significant role.
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The biggest, and most common, mistake that you can make is to believe that everything comes down to customer acquisition cost (CAC) in one aggregate figure. It is imperative for you to stop judging everything in terms of dollars and cents without examining the details. The best way to do it is to take time in understanding the CAC divided into individual channels. You may use tools such as Google Display, Facebook, Google AdWords and so forth. If you are using the former method, it is imperative for you to note that it can be misleading.
2. Scale Effects
The effects of scale mostly do not work for you when it comes to paid marketing. It is an unhelpful notion that many startups have that the campaigns should run longer to achieve greater success. It is a fact that ad campaigns become less effective when you run them for a very long time. When people begin to see too many of your ads, the messaging in it becomes stale. It will eventually lead to a return to the market average.
Another major problem that you will face is saturation. Now, this happens because you exhaust your core customer base. The additional volume produced through paid marketing is then going to be coming from non-core demographic groups that are much less likely to want your product. You might get a big boost from a paid promotion and think it’s a surefire way to succeed, but if you’ve exhausted the core demographic, those successes will dwindle.
4. Don’t Discount Competitive Dynamics
You will often find many competitors in a popular market segment that are looking to not only copy what you are offering but also duplicate your advertising strategy and copy. It is not challenging to copy what the competition is doing. When it comes to the ads, you are competing with almost everyone that is going after the same demographic. Be aware of your top competitors and monitor how they are approaching marketing in the space.
Remember that the overuse of paid marketing can paint you into a corner. Rethinking your approach can be challenging but is not impossible. Creating unique messaging, product differentiation and doing ad tech integrations will be difficult.
There are some scenarios in which using paid marketing makes a lot of sense. But in many cases, it has diminishing returns. When done well, network effects will take care of continued growth at a certain point and paid marketing will no longer be the bread and butter of your marketing strategy. In this case, you may plan on using paid marketing initiatives to help growth. It is possible for you to scale your revenue to new heights making huge profits if you start to use up-and-coming ad platforms.
But this will happen without much profitability. One thing that you should do to ensure long-term success is that you do not rely too much on paid marketing. It is necessary for you to incorporate new channels as well as fix high customer churn. You need to calculate the actual CAC for every channel correctly before you start to congratulate yourself.