The Digital Marketing Evolution

The Digital Marketing Evolution
Illustration by Luc Chaissac
By Alex Kracov
ex- VP of Marketing at Lattice
CEO & Co-Founder of Dock.

Previously, scaled Lattice from seed to 2,000+ customers like Slack and Postmates.

The Glory Days of Digital Advertising

Over the past 20 years, it’s no secret that digital advertising has been the strongest business model on the Internet. Google and Facebook have grown their businesses on the back of digital advertising reaching $2.5+ trillion in combined market cap. 

These business models worked because it drove huge results for the companies and the marketers who ran these campaigns. Prior to digital advertising, marketing was a non-metrics business. It was really hard to tell what actually worked.

Half the money I spend on advertising is wasted; the trouble is, I don't know which half. - John Wanamaker

With the rise of digital advertising, marketers were finally able to track revenue to their campaigns. This led to a huge change from the Mad Men style of advertising to the demand generation and growth hacks that marketers are now expected to do. 

Marketers became more data-driven. People started to look at marketing as a math problem - spend $X to drive $Y revenue - and spent their time in spreadsheets and optimizing conversion rates.

With each new Internet network, there was an arbitrage opportunity. Google search helped marketers reach people who literally were looking for your product or service. Facebook took personal targeting to the next level with its social and interest graph. LinkedIn did the same thing with business professionals, now B2B marketers had an open database full of prospects that they could reach. Youtube took TV ads online and helped marketers reach niche audiences they could never reach before. Programmatic display ads promised to find your target audience and follow them around the Internet. The innovations were seemingly endless and exciting for marketers. 

The fuel for the Internet economy was data. Consumers used these products for free in exchange for their data, which the companies then used to run their advertising business. Google would take all of the data from Gmail, Youtube, AdSense and more to show consumers the perfect Adwords ad when they search. This became standard internet practice. Every pixel that marketers placed on a website became a powerful data signal that Internet companies used to refine their advertising. As users moved from site to site, they would get cookies, which saved information to a user’s browser. This adtech told Internet companies what websites consumers visited, what devices they used, their location and more. Enterprising Internet companies took this data collection to the next level. They worked with third-party data providers like Acxiom and Experian to create an even more detailed profile of their consumers that included information like credit card data. Now, companies not only knew what websites you visited, but they also knew where and how much money you spent.

This was a dream for digital marketers. Marketers were finally able to reach niche audiences and actually measure the results of these campaigns. This new power helped the Internet economy grow up. An entire generation of businesses were able to grow on the back of these new ad targeting technologies and their algorithms. With data behind them, companies were able to show venture capitalists how they could predictably scale their business. And marketers everywhere, tried to hack the various algorithms to make their company go viral. Everyone wanted to create the next Dollar Shave Club video and smart marketers knew how to take advantage of the various opportunities across the different networks. 

Advanced digital targeting was also better for consumers. No longer did consumers get irrelevant ads, instead they got hyper-targeted ads around products they actually liked. Advertising became a medium for bringing new products and services to consumers, no longer did consumers have to be subject to generic advertising, instead they could be exposed to products and services they actually might be interested in. It was a win for marketers and consumers. 

The Rise of Data Privacy and End Of Digital Ads As We Know It

Historically, the Internet economy operated around a compromise. Consumers give data in exchange for free services. But as the Internet economy has grown, consumer sentiment has shifted. It started with consumers noticing ads following them around the Internet and joking how creepy that was. And it’s evolved into a much bigger concern. Today,  “One in ten internet users around the world (and three in ten US users) deploy ad-blocking software that can prevent companies from tracking online activity.” (source)

Governments have also stepped in to regulate tech companies. In 2018, the EU passed landmark legislation - the General Data Protection Regulation (GDPR)  - to increase data privacy requirements for companies. And in 2020 California passed a similar law the California Consumer Privacy Act (CCPA). These regulations gave consumers more control over their own personal data and marketers needed to take various measures to comply with the new regulation. 

Another trend that has emerged is the amount of fraud in digital advertising (examples), particularly when it comes to programmatic display ads. Fraudsters use a combination of tactics to drive fraudulent revenue from digital ads. They’ll use bots to drive fake clicks, impressions and traffic, place ads below the fold where nobody sees them, use fake data to show false inventory, and more.

“The total cost of ad fraud is debated: TrafficGuard/Juniper set it at $34 billion, predicting it will increase to $87 billion by 2022; most of this will be lost in the APAC region, with the current $19 billion set to rise to $56 billion” (source)

This fraudulent activity goes both ways. There’s true criminals who are out there trying to game the system and actually steal money from the tech giants and marketers. But it was also driven by many companies in the industry. In the constant quest for revenue growth, tech companies inflated their own targeting abilities in order to get marketers to spend more money. In many cases, the technology was real, but there was greater risk for imperfect data and targeting than most in the ad tech industry let on. Digital ads were not as effective as many companies made you think they were. 

Additionally, If you’ve paid attention to any Internet news over the last couple years, there’s been a growing trend of tech giant distrust (who are also the key players in the advertising industry.) The debate is wide ranging from conversations around the first amendment to impacts on election to data privacy concerns. Facebook’s Cambridge Analytica scandal was one major moment for the industry. This huge data leak impacted 50 million Facebook users and brought data privacy concerns to the forefront of the tech debate. Facebook responded by cutting ties with third party data providers like Axcion and Experian in an effort to give users more control over their data. Separately, Google has taken heat from EU regulators around data privacy concerns and has slowly started to change some of its global privacy policies. 

Apple - the only tech giant whose business model is not reliant on digital advertising - has embraced privacy and has even started to run billboards around this position. 

Apple has built features in the iPhone to back up this position. Earlier this year, they announced App Tracking Transparency, which gives users the ability to opt-out of apps that track you.

"Your Apple devices have a unique number called an “advertising identifier” that can be used to uniquely identify your device for the purposes of ad targeting and tracking. By associating this identifier with other information, app developers have been able to build incredibly detailed records of how you use your iPhone or iPad, including in other apps and across the web."(source)

With the latest IOS change, users can opt out of this practice with a single click. 

It’s clear the market landscape and consumer reaction towards digital advertising is changing. The wild west of digital advertising is over. Tech giant advertising will continue to exist and drive returns for marketers. But will face more regulation and shifts in consumer sentiment, which will impact their targeting capabilities. 

From a marketer's perspective, the growing importance of data privacy, means reduced targeting capabilities, which means less effective digital advertising. In the coming years, marketers will need to find new strategies and will need to rely less on Google/Facebook and the ad tech industry to drive awareness and leads for their brands. 

Hope for the Internet Economy

While the ad tech industry is slowly dying, subscriptions have emerged as a viable business model on the Internet. It turns out that consumers are willing to pay for access to content, products and services. There’s so many examples of this emerging trend from SaaS to Substack to TV. Just look at how many different Internet tv subscription services you’re signed up for, the number of software subscriptions you have, and how many newsletters you’re subscribed to. Subscriptions are eating the world. 

Subscriptions are a powerful tool to drive revenue. You acquire a user once, and they stay with you (hopefully) for a long period of time. The retention rate for a successful SaaS product is over 100% of revenue, which means that customers will actually spend more with you over time. And single journalists are making tens of thousands a month by publishing a newsletter via Substack. 

Importantly, subscriptions don’t just have to be paid, free subscriptions can be equally powerful. From a marketer’s perspective, subscriptions are an incredible way to build a relationship with your audience. Consumers who sign up for subscriptions feel like they are part of a community. They have a connection to what you’re creating. The most evangelical fans eagerly wait to read the weekly newsletter, listen to the next podcast or watch the next episode. Subscriptions are a powerful tool to building brand loyalty. 

Digital Marketing Evolution: The Shift to Owned Audiences

These trends across the Internet economy have important implications for how marketers build a brand and acquire customers in the coming years. 

Own your audience

Companies need to have a direct relationship with their customers. As third party data targeting declines because of privacy concerns and tech giant regulation, it’s essential that marketers have a first-party data strategy. Marketers need to build a database of customers. Marketers need to start thinking more like subscription companies.

Importantly, there's lots of different types of subscriptions and they are not created equal. One of the best subscriptions is an email list. Email subscribers give you the ability to track customer behavior and have a direct line to (potential) customers. I personally believe that email is the best way to own an audience because it's largely independent from any third party meddling.

But there are more examples beyond just an email list.

Brand is a powerful way to own an audience. When you have a strong brand, it takes up space in someone's mind. And when they want something, they just come directly to you. A great example of this is Airbnb. Over the years, Airbnb has run tons of great brand advertising campaigns and generated tons of PR to get their name out there. But more importantly, Airbnb has created an awesome product experience that makes customers happy.

“While its competitors rely on search engines, Airbnb enjoys a huge direct traffic advantage (67%), compared with Expedia and on 46% and 41% respectively.” (source)

Airbnb built a strong brand relationship with their customers and this allows them to not rely on third parties for their business.

Podcasts are an amazing way to build brand and have a captive audience. When you subscribe to a podcast, you get the episodes delivered to you each week on your phone. But more importantly, there's something about audio that feels more personal. The hosts start to develop a quasi-personal relationship with the audience and this can be really powerful in driving action.

Applications are another big category of owned audiences. Starbucks’ app drives brand loyalty and repeat purchases, while giving Starbucks a channel to market to their customers directly.

The Starbucks Reward Loyalty Program has a staggering 16 million active members (as of March 2019), with 11% growth of their user base in Q2 2018. Starbucks attributes 40% of its total sales to the Rewards Program and has seen same store sales rise by 7%. (source)

Of course, there's all the social networks. Facebook, Instagram, Twitter, Youtube, Tiktok and more, where people have tons of followers. While many of these networks are pay to play, there are many benefits to having a huge following on these networks. It's an owned audience of sorts, but not technically first-party data.

Each of these audience types have pros and cons. Email inboxes are crowded, podcasts get buried in Apple's bad app, videos rely on Youtube's algorithm, etc.

The value of an audience comes down to first party vs. third party data. First party data is better. It gives you direct access to reaching and understanding your customers.

Don’t rely on third parties

When most of your traffic/business comes from third party audiences it’s often a ticking time bomb. One change to an algorithm or partnership can seriously impact your ability to drive revenue. For example, Yelp got most of its traffic from Google Search, but as Google built up it’s local listings on Google Maps, Yelp got pushed farther and farther down the search page. This has led to a long regulatory battle between Yelp and Google. Another example is Teespring, a Silicon Valley darling, who built its early business off the back of Facebook Ads. But when Facebook changed its algorithm, the business cratered. 

Even if your business isn’t impacted by a third party change, another reason to build your own audience is money. When you use rented audiences to drive traffic, it becomes expensive and transactional. Everytime you want to drive leads/revenue, you need to spend money.

Of course, paid ads can work, but the incentives are not always aligned. The platform / owner of the audience wants to make the most amount of money for the lowest amount of leads that will keep the advertiser happy. These same placements also quickly become overloaded with advertisers. Just imagine sponsoring an email newsletter. Every week there is a new advertiser and the audience quickly becomes desensitized to the ad placement and glosses over the ad in order to get to the actual content. 

Acquire customers from your audience

When you own your audience, you don't need to spend money to acquire customers. Instead of always spending ad dollars to acquire a user, you can actually acquire revenue from your existing subscriber base.

The best part of focusing on your own audience is that the subscriber base already has a relationship with you. They’ve interacted with you and signed up for something. And instead of having a bunch of advertisers clamoring for their attention, there’s only one - your brand. This means that they are more likely to take action and actually convert to revenue. They’ve been warmed up and are farther down the funnel.

Grow your audience

An important question is how do you actually grow your subscriber base. This starts with coming up with bait. Essentially, what will someone give their email in exchange for? Why will they subscribe to your company? The answer is typically some sort of content (e-book, podcast, newsletter, etc), an event (conference invitation, webinar, etc) and/or tool (software product, spreadsheet template, etc.). The better the bait the more signups. Each of these programs/campaigns create onramps to your subscriber base and expand the number of contacts in your owned dataset.  

Over time, the subscriber base will grow itself. As you engage subscribers, they’ll share the content and tell their friends. There will be a certain amount of organic growth that you generate each month. But of course, marketers and companies are impatient and want to grow fast. So that’s where third party audiences can be helpful. 

Marketers can run paid ads on networks to grow the subscriber base, sponsor newsletters, co-create webinars, optimize their content for SEO, etc.. to help grow their audience. These become the promotion channels for the different onramps to your subscriber base. 

Owning your audience also helps make your ads perform better on third party networks. Instead of needing to rely on third-party targeting, you can use custom audiences to reach your audience on Facebook, Youtube, Instagram, Google, etc. This is where the enrichment we talk about below is important. The better the profile, the better the ad targeting.

As discussed throughout this post, most of these third party audiences will have diminishing returns over time. So it’s important that you only use these channels as temporary means to get new folks into your audience. The real work starts once you’ve caught the audience's attention and they’ve subscribed to your list. 

As more companies own their audience, audience growth will come more from other audiences (i.e. partner marketing). Teaming up with a partner company to cross-promote your company/content on their newsletter, events, podcast, etc. If you want to grow a newsletter, partner with other newsletters. If you want to grow your podcast, appear as a guest on another podcasts.  

The partner's audience is exposed to your content. If you capture their interest enough, they'll subscribe to your podcast, newsetter, etc. and eventually buy your product.

Case Study: HubSpot and Hustle -The recent Hubspot acquisition of the Hustle supports this growing trend to first-party data.  HubSpot is a b2b marketing/sales platform for small-businesses. HubSpot needed an efficient way to reach their audience - business owners and entrepreneurs - and knew that relying on third parties was not going to scale. So they went out and bought the Hustle an email list with 1.5m subscribers and My First Million, a podcast with 400k+ downloads an episode. Now HubSpot has a captive audience to build their brand and indirectly market their software product.  

Enrich your audience with data

In this world of owning your own audience, third party data becomes more about enriching your own audience. Services like Clearbit give you information in order to fill out a complete profile of your customer. Over time, the marketer's job shifts to trying to get a complete profile of the customer. Why is this important? It comes down to personalization. 

The more personalized the message, the content, etc. the more likely the consumer is to take action. This will make your campaigns more impactful and ultimately help you drive more revenue. 

Nurture your audience

After you get someone to subscribe, it’s the job of the digital marketer to create programs that engage the audience and provide value to them before they will ever consider using your products.

When nurturing your audience, you need to create ongoing content. This is content that continually keeps you top of mind and builds a relationship with your audience. Newsletters, blog posts, podcast episodes, events, etc. are all examples of great ongoing evergreen content.

But you also need big moments to celebrate with your audience, a celebratory milestone. An example of this is Lattice’s Resources for Humans’ conference, which was a free virtual conference of 22k HR pros. This conference gave our HR community a ton of free advice and networking opportunities. It was a huge celebration for the community and the modern HR movement.

Importantly, you need to create campaigns that encourage the subscriber base to grow itself. These are campaigns that get your audience so excited that they will share with their friends. A few examples might include a famous guest speaker, free swag giveaway, informative content and more. Provide value and then make it easy for your audience to share. 

Understand your audience

Lastly, when you own your audience you’re able to more effectively track the user journey, which helps with marketing attribution. You’re able to track the user as they interact with emails, different programs, etc. so you can really get a sense of the multi-touch journey and that consumer’s relationship with your brand. This will give you powerful insights into figuring out what’s working and not. 

Implications of the shift to owned audiences and first party data

As the Internet shifts to owned audiences, the Internet will look more decentralized. Companies (and creators) will have their own audiences around different niches. As with any big shift, this will have positive and negative implications. 

The major benefit is that consumers will get to be connected with like minded folks around the world. They’ll get products that fit their unique use cases, be connected with folks with similar interests, and be able to go deeper on the subjects that matter most to them. 

But as consumers self select for niche communities, there will be more extreme filter bubbles. No longer will everyone be getting their content/community/products from the same big companies. Instead, it will be more fragmented based on people’s interests. This will only increase the polarization that we see in the world today. 

From a pure marketing perspective, the marketers who have a point of view will win. These marketers will be able to create niche independent audiences that build brands and drive revenue.

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