So Apple & Facebook (now Meta) went to war.
The Background
Every e-commerce/DTC store knows that digital ads are the most effective strategy to getting new customers. Not surprisingly, Facebook was every DTC’s go-to. With the breadth and depth of data that Facebook has, they were able to help their advertisers market effectively by delivering super targeted ads.
At the same time, privacy was becoming a concern for end-users, and Facebook was consistently getting slack for their poor business practices. In an effort to protect their users, Apple stepped in with an iOS 15 update that inhibit apps like Facebook from collecting data on their users’ activity. With less access to customer data, Facebook ads lost power. Customer acquisition costs (CAC) were already through the roof – this is only exacerbating it.
What I don’t understand – Market Economics
Please correct me if any of my thoughts are off here, but here’s what I’m confused by.
Facebook ads is essentially a marketplace. The supply of the marketplace is the ad slots they are able to sell on the platform. This is driven by number of users, time spent on the platform, and how often users can be advertised to without churning. So it’s:
Users * Time on Platform * Ads Per Minute
Of course, Facebook’s goal is to drive supply up. As supply increases, price decreases – and this benefits advertisers.
On the demand-side, you have advertisers who are doing what they can to drive CAC down. This means understanding their target persona, advertising to the right user groups, creating ads that drive clicks, and building landing pages that convert. If any of these steps is not fully optimized, CAC will increase and eat into their margins.
With this information, any online advertiser wants to optimize as much as possible before spending most of their funds on online advertising. But it isn’t the same with the iOS 15 update.
Now it takes more ad spend to drive sales because the ads are less targeted and effective.
So the ads should be worth less right?
But they aren’t.
Here’s what doesn’t make sense to me: if the ads are inherently worth less, why aren’t their prices changing?
Shouldn’t this reduce the bid prices of advertisers on Facebook and send them to other channels?
At the same time though, they need to understand what a reasonable CAC is to create a sustainable business.
What does this mean for the future of advertising?