Opinion: New challenges rise in the D2C marketing with diminishing Return on Ad Spends (ROAS)

Customer acquisition Costs are no longer as lucrative as they were and with time new challenges such as drop in ROAS have cropped up in D2C marketing says, Aadil Mehta, CEO & Partner, Ting.

Haven’t we heard enough of “digital is the future”, “direct to consumer is the future”, “digitization is the future”. Not really, if you think it’s the future, you’re lurking somewhere in the past. It’s very much the present. COVID19 has propelled the DTC business into a new stratosphere, and it will be interesting to see the trajectory of growth in the coming years as we move towards normalcy.

The pandemic has shown us how fragile things are and how quickly things around us is evolving. Consumer behaviour, patterns and sentiments have seen a massive shift during the pandemic and continue to do so as things come to normalcy. Businesses of all kinds, SME’s mid-size, independent professionals and homegrown start-ups are all marching into this burgeoning space of social and digital media.

The seemingly low entry barriers are allowing new (and old) brands to mushroom into the digital space. However, it’s not all rosy. The CACs (customer acquisition costs) are no longer as lucrative as they were, say sometime around April 2020 and pre-covid times. With time, new challenges have cropped up and the DTC world is also seeing a drop in ROAS.

Since the pandemic began, we have seen significant increases - up to 400% in CPCs (Cost per clicks). This added with an influx of new brands and competition, has reduced the conversions on brand DTC websites. 

Apart from this, heavy discounting and offering lucrative deals have suddenly led to a major downward spiral in the ROI (Return on Investment) from online transactions. Through our brief yet regular interactions with Facebook, they have explained that the increase in costs is a sticky phenomenon, attributing it to the massive rush of brands wanting to advertise online. By their own admission, costs will continue as the economies recover and more brands get onto the DTC bandwagon.

Also Read: Opinion: What makes mobile ads click…

So while, the fast growing Indian consumer base of 50 million in 2018 and started to quadruple in 5 years provides compelling tailwinds, in the advent of high click costs, lower conversions, price wars, overheated competition, ecommerce aggregators providing impeccable services and low costs, select few advertising options, curbs on data tracking, DTC brands will face serious headwinds in the near future.

Brands can no longer rely on the major online advertising platforms to build their DTC businesses. Start-ups, small businesses, and entrepreneurs need to rethink their business models.

The right product fit for a successful DTC business should be those that can clock a ROAS of 1:5%, keeping the cost of goods relatively low (say less than 30%) of the MRP. The average billing size should be mora than Rs.1000 and the products should have certain tangible uniqueness to them. This will avoid burn and keep positive unit economics to refuel future growth.

Brands will need to move away from product or catalogue marketing and build solid affinity and authenticity for the consumer who’s spoilt for choices. New-age entrepreneurs should refrain from ‘me too’ products and focus on creating interesting niches and product innovations, focusing on aftersales, as it holds equal importance as sales.

Today’s digital consumers are loyal to brands that provide great after service, maintain accountability, and offer quick solutions. We at Ting have worked with brands that have mastered the after-sales experience in multiple ways. Great product quality and tremendous after-sales services play a vital role in the continuous building of customer relationships by adding value and participating in daily conversations. These brands are creating positive word of mouth and higher retention. In a space with low returns on ad spends, the LTV (lifetime value) and return purchase with consistent remarketing and retargeting helps make the online advertising space viable.

Tactically, brands need to adopt better MarTech systems to ensure marketing funnels are efficient and state of the art. Having automated emailers, push notifications, heat maps, WhatsApp integrations, Granular analytics, and communication, among other integrations, are critical in improving CACs.

In conclusion, these are very exciting times for the digital ecosystem of payment integrators, logistic companies, marketing agencies, entrepreneurs, and consumers. A phase of consolidation is on its way and within the next year or two, strong players who have built credible brands and have the war chests to survive the current onslaught will start dominating the DTC business. The customer has and will always continue being the king, and those brands that focus on customer delight will be in for the long haul.

The article is penned by Aadil Mehta, CEO & Partner, Ting.