Thoughts on Leveraging First-Party Data

As the world confronts tougher economic times and inflationary pressures, companies are under pressure to reduce burn and manage expenses, while figuring out how to keep the top-line growing. For venture-backed, digitally native consumer brands (DNCBs), these pressures may be even more intense given the need to invest in growth, while managing rising costs and the all-important cash runway.

Digital marketing on social channels likely represents a DNCB’s largest and most important growth investment. It is the primary way these companies target and acquire new customers. For a variety of reasons, DNCBs have seen their marketing costs increase dramatically over the last year.

According to Gartner, marketing costs in 2022 were roughly 9.5% of total company revenue, versus 6.4% in 2021. Many companies are reporting significant upward CPA (cost per acquisition) pressure across all their social marketing channels. A survey of several Fernbrook portfolio companies indicates that CPAs on social media channels are up 20-25% on average.

There are multiple drivers of these CPA increases, so venture-backed companies need to be precise and creative in how they address this headwind. The demise of third-party data is driving most of this disruption. In this article we explain how brands can work around these data hurdles and optimize their business for growth in this new world of digital performance marketing. Essential to this effort is the collection of First-Party Data[1]. Fernbrook is pushing portfolio companies to look beyond digital marketing and investigate and invest in new marketing channels.

 

The Problem(s)

For years, Facebook, Instagram, Snap, Twitter, YouTube, and other social platforms were the primary digital marketing platforms for brands. These platforms collected immense amounts of data from consumers and then used this data to accurately target ads to consumers, charging advertisers for access to their ad platforms.

The accuracy of ad targeting was driven by using third-party cookies. These cookies, which collected and shared a consumer’s personal information, like location, email address, and phone number, with businesses and other entities for the purpose of serving targeted ads are commonly referred to as “Third-Party Data”. Until recently, consumers had no means to opt in or opt out of app tracking. Meanwhile, targeted ads became one of the backbones of the internet’s economy.

Now, the age of user privacy is underway, marking the end of the third-party data era. The first blow against third-party data was struck on April 26, 2021, when Apple introduced its App Tracking Transparency Policy. This policy required iPhone apps to give users the option to opt out of being tracked for advertising purposes. The impact of these changes is just starting to crystallize.

Analysts estimate that the Big Four tech companies have lost upwards of $10 billion of advertising revenue from these privacy changes. Likewise, Insider Intelligence reported that DNCBs cut their advertising budgets on Facebook and Instagram by nearly 8% over the 12-month period after these initial privacy changes were implemented.

This situation will be further exacerbated if Google Chrome fully deploys its plan to stop supporting third-party cookies. The European Union already strengthen its citizens’ data privacy rights with the implementation of its GDPR regulatory regime.

These changes make ad targeting much more expensive and challenging for the tech platforms to find leads and customers. Results are less accurate, so the platforms work harder for each acquisition, and the brands are forced to pay more for each ad.

 

The Solution(s)

Apple’s privacy changes have already massively impacted CPAs for on-line advertising. If Google moves forward with its plans to phase out third-party cookies, CPAs likely will further increase. While new identifiers are entering the scene, they will only cover a small percentage of the overall market. These addressable impressions will likely create intense competition and even higher prices.

DNCBs are bearing the brunt of these changes because they rely on on-line advertising to target and attract new customers. The obvious way to combat the CPA pricing surge is for companies to reduce ad spend, but these companies need to invest in growth, so this is not an option. The trick is where to spend the precious marketing budget amid rising CPAs and these changes to the privacy and advertising landscapes.

With the demise of third-party data, companies need to focus on collecting as much first-party data as possible and leveraging it in all directions. “First-party data is highly valuable to companies and its ownership because it is directly linked to their customers or users, allowing them to gain insights into their behavior, preferences, and needs.”[2]

 

Invest in New Channels

  • In today’s competitive environment, companies need to leverage whatever valuable first-party data that it has in hand. In doing so, they need to experiment on alternatives to social channels, like catalogs and direct mail, podcasts, TV, new channels like Reddit, Discord, Twitch, and expand omni-channel presence with pop-up stores, along with wholesale and retail distribution channels.
  • While there may be resistance to direct mail and TV from DNCBs, there may be excellent ROI from new channels if companies apply the same data-driven approach they have taken to their social marketing efforts. With new connected TV technology in use, advertisers can now precisely reach viewers based on granular targeting specifications.
  • Fernbrook has also seen an increase in the use of catalogs and direct mail efforts. Off-line marketing grew from about 12% of a DNCB’s overall ad spending in early 2021 to over 15% at the start of 2022. Surveys indicate that in 2022, direct mail and catalog delivered up to 3.2x for every dollar spent.
  • Ten Thousand, a leading fitness apparel brand in the Fernbrook portfolio, has adapted to shifts in the digital landscape by prioritizing the diversification of their marketing mix toward off-line and non-paid social channels. For example, with their CPAs on Meta and Google up over 20% year-over-year, Ten Thousand made a concerted effort to focus significant investment and effort on scaling up their direct mail program.
  • Over the course of 2022, catalogs made up over 2x the share of Ten Thousand’s total marketing budget than they did in 2021 – and correspondingly driven over 4x the customer acquisitions than they did in 2021. And beyond their first-time customer acquisition efficiency, catalogs are also driving an inherently better customer to Ten Thousand.
  • “Not only are catalogs driving an increasing share of our new customers, but the new customers that we’re acquiring via our catalogs are stickier customers,” Ten Thousand Co-Founder and CEO Keith Nowak said. “They spend more on their first purchase, repurchase more frequently, and spend more on subsequent orders, with their lifetime value after their first six months as a customer over 45% higher than that of our steady state new customer. In the world of rising CPAs, the fact that catalogs are not only helping us lower acquisition costs but also driving stronger long-term customer behavior is opening up more gross profit dollars to allow us to continue to invest heavily in growth.”
  • Today’s modern direct mail campaigns are built on the same modeling principles used for social media and digital advertising, and it typically has richer data sets, including purchase history, which allows brands to track customer lifetime value. This data allows brands to identify stickier customers who likely will have greater lifetime value, as opposed to some social and digital marketing that results in a wide search generating one-time purchasers who may not be profitable customers.
  • While Fernbrook acknowledges that developing these alternative marketing channels may carry significant costs, the increased costs of building audiences in new channels may deliver to DNCBs new long-term customers with longer retention tails presenting access to even more robust first-party data. With no ability to predict what the global economy will bring or how the privacy and advertising landscape will evolve, these new channels built on the back of first-party data may be what these brands need to survive and prosper.

Optimizing First-Party Data Hygiene and Management

  • One of the keys to building a successful first-party data-driven marketing strategy is ensuring that the data is clean and organized. Data management strategy and hygiene are critical first steps to efficiently leveraging such data for invaluable customer behavior, sales trends, and purchasing cycles. Management of large data sets does require some level of attention and investment, but the risks of not doing it far outweigh these costs.
    • Establishing Standards
      • Creating a data standards framework is a critical component of maintaining strong data hygiene. This framework should outline the rules, regulations, and protocols regarding data collection, storage, and processing. It is important to ensure that all team members understand and adhere to these standards, as this will help create uniformity within data sets and guarantee that the data is accurate and reliable.In addition, it is important to define roles and responsibilities for each team member involved in data collection and management. This will help ensure that the data standards are followed, and that data is being managed in a systematic and organized manner.
    • Identifying and Removing Duplicate Records
      • Duplicate records can occur due to user input errors, data transfers, or other factors. It’s important to regularly identify and remove duplicate records from your data sets to ensure accuracy. To do this, compare records side-by-side and identify any discrepancies. Once identified, delete any duplicate records, and ensure that the remaining records are up to date and accurate. Additionally, consider implementing automated processes to detect and remove duplicate records, as this can help streamline the process and reduce the risk of human error.
    • Monitoring Data Quality
      • Data quality can start to degrade over time, so it’s important to monitor data quality regularly. Schedule regular audits of your data sets to identify any discrepancies or errors and use analytics and reporting tools to identify any underlying issues. This will help ensure that data is complete, accurate, and up to date. In addition, it is important to have procedures in place to address any issues that arise from data quality audits. This could include remediation plans, root cause analysis, or other corrective measures.Maintaining strong data hygiene is essential for any organization that deals with ecommerce data. Establishing standards, identifying, and removing duplicate records, and monitoring data quality are all important steps to take to ensure that collected data is accurate and reliable. By following these best practices, organizations can make sure that their data sets are high-quality and useful, and that their data-driven decisions are based on accurate information.

 

Conclusion

As a technology investor, Fernbrook expects its portfolio companies to be open to experimenting with how to constantly improve and optimize their businesses, and to understand, manage, and leverage its data. Board members need to understand how companies are activating its data to drive acquisition, retention, and customer lifetime value.

While DNCBs need to balance marketing spend versus the projected return on investment, when the game on the field changes, management teams need to play it and find ways to evolve and set up their company for long-term success. Given the current economic challenges, Fernbrook believes every company needs to explore methods to better attract and engage new and existing customers more deeply, control increasing customer acquisition costs, and sustainably scale the business.

Bill Detwiler | Fernbrook | February 2023

[1] For clarity’s sake, First Party Data is data collected directly from interactions with customers and audiences on a brand’s owned channels, such as a website or mobile app. Data comes from customer purchases, browsing behaviors. search history, support, and customer success programs, as well as marketing programs.

[2] MEMO: WHERE NATSEC MEETS COMMERCE, by Web Smith, 2PM, https://2pml.com/2023/02/22/natsec/#memberful_overlay

February 27, 2023

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