Changes to Facebook Ads Have Caused a Reckoning for Direct to Consumer Brands

Written by: Online Business Owner • March 28, 2022

Image Source: www.unsplash.com/@jpvalery

Warby Parker. Allbirds. Stitch Fix. FIGS. All popular direct-to-consumer brands that built their companies on the internet thanks to cheap advertising and free social media content.

But new reporting from Alex Kantrowitz on the Big Technology Substack documents how rising Facebook ad costs, changing internet privacy policies, and a rapid increase in shipping and production costs (spurred on by the pandemic) are challenging these once-booming businesses.

“A Big Technology analysis of public DTC companies with market caps of more than $800 million found nearly every one of these companies are dealing with revenue contraction, shrinking margins, runaway losses, or a combination of all three. Together, they’ve lost billions in market cap in 2022, drastically underperforming the market in an already bad year.”

The one factor doing the most damage? Rapidly rising Facebook ad prices. Kantrowitz writes for Big Technology, “These companies have long relied on affordable Facebook advertising for growth…[o]perating largely without physical storefronts, they’ve used Facebook to reach customers who may otherwise have walked into a real-world shop.”

The prices have increased dramatically over the past several years due to more brands using the once-affordable advertising tool which causes more demand while supply continues to contract (as Meta experienced a drop in Facebook users for the first time in 2021).

“In two years, it's basically doubled to tripled,’ said David Herrman, a social media ad buyer, of the cost to advertise on Facebook. ‘In the U.S. the cost to reach 1,000 people on Facebook jumped from $6 to as much as $18 within the past two years”, Herrman said. (Note: this is in the context of DTC e-commerce brands, not necessarily for online businesses that sell courses or coaching.) Then you add in the introduction of Apple’s iOS privacy updates in 2021 (which created massive issues with ad performance and results tracking) and you have an environment where once tried and proven methods are no longer effective (and what is working is now a lot more expensive).

So are online businesses that sell knowledge products, coaching, consulting, and services feeling the same pinch?

Yep! Ad costs are up which means lead costs have increased and profit is down (expecially when using the same strategies of years past).

I started a quick conversation about this over on Facebook and saw many online business owners, including those who specialize in Facebook Ads and paid traffic, confirm my suspicions.

“We have pivoted to spending more on ads to content (mainly blog posts) with clear calls to action,” one marketing strategist wrote.

A Facebook Ads expert chimed in, “SLO [self-liquidating offers, a popular strategy for selling a low-cost product to cover ad costs] funnels have become less attractive because of both the difficulty in tracking and the higher cost for that first purchase…[t]here's really no more of this profiting on that first $27 product.”

Another paid traffic strategist offered some more context on the issue of rising ad costs and how its impacting online business, stating that much of the change in ad costs is related less to higher costs and more to changes in tracking.

“Results are often delayed…another thing that was eliminated was 28 attribution…the costs “look” higher because we no longer see results that are happening 3-4 weeks out. Now we can only see results within 7-day view or 1-day click. The way we consume the data has changed.”

“Ads do still work!’ writes another marketing and ads specialist, ‘Experimenting with on-platform Lead Forms has helped me personally keep my lead costs at or under where they were…”

Why this matters for online business

We must accept that changes to Facebook Ad costs will continue in the months and years ahead. Much like DTC brands have moved on to other platforms with cheaper ads and cheaper leads, many online businesses may do the same (platforms like TikTok are rapidly gaining popularity for paid strategies). There’s also been a shift in online business over the past 24 months with more business owners opting for selling higher-priced products like group coaching programs. This allow them to remain profitable even with higher lead costs.

Regardless of what you’re selling or how you generate leads in your online business, it’s safe to say that the golden age of Facebook Ads is nearing its end. The platform is losing users and the over saturation of brands advertising creates a classic supply and demand problem. And while Facebook Ads aren’t going anywhere and can still be a piece of a successful marketing strategy, building an entire business model, offer, or funnel around Facebook Ads alone is no longer smart or sustainable.

Entrepreneurs must adjust their thinking about how paid traffic fits into their overall strategy and adjust their expectations when it comes to how much leads truly cost. We also believe online businesses should consider their next moves thoughtfully and develop a strategy that isn’t fully dependent on organic social media or paid traffic from social. 

Here at OnlineBusinessOwner.com we are bullish on classic, tried, tested, and proven marketing strategies like blogging, podcasting, and email marketing for digital entrepreneurs. These strategies are platform agnostic and safer from algorithms (although growth may be slower and the changing landscape of internet privacy can still cause issues). While social media platforms have historically provided an amazing way to find and nurture an audience and make sales, it’s unsafe and unrealistic to believe these platforms will continue to provide the same results forever. A new generation of consumers (Gen Z is old enough to make their own purchasing decisions) paired with changing expectations around online privacy, new approaches to social media, and ever-evolving consumer habits means what used to work won’t work forever.

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