Today’s column is written by Ratko Vidakovic, founder at AdProfs.
With the digital ad market poised to continue growing by double-digit figures, Facebook and Google will, unsurprisingly, “account for 90% of that growth,” according to Brian Wieser at Pivotal Research.
One of the biggest factors [PDF] behind the duopoly’s growth: They both have easy-to-use self-serve platforms with no minimum spend requirements.
Google AdWords and Facebook Ads make it easy for businesses of all sizes to start advertising with them. Having a self-serve offering with no minimums allows them to scale their ad businesses to millions of customers.
To be clear, every major demand-side platform (DSP) has a self-serve interface. But there is a difference between having a self-serve interface and a true offering for small and midsize businesses (SMBs).
Why then, after nearly a decade, has the ad tech industry failed to produce a scaled self-service DSP for the SMB market? There are many reasons, but here are just a few.
Hard-to-scale customer acquisition
Most SMB customers spend a relatively small amount on advertising campaigns each year compared to agencies and large brands. They are also notoriously difficult to attract and convert into paying customers.
To profitably acquire SMBs, DSPs must drive customer acquisition with cost-effective and scalable marketing channels that are generally inbound in nature. At this stage, these strategies are fairly well known and have been refined by countless tech companies.
So why do so few DSPs use these strategies, instead relying on high-touch, expensive direct salesforces? The answer is that this is a necessary function of their business model, but we’ll get into that more in a minute.
High churn in the SMB market
The obvious upside of the SMB market is that it is enormous. However, having millions of small businesses advertise on your DSP comes with important trade-offs to consider.
SMBs, for example, are typically more price sensitive.
The average lifetime value of each SMB customer is much lower than midmarket and enterprise customers, while the churn rate is higher. SMBs also typically require more handholding, creating a burden on support.
Higher service costs relative to enterprise
Due to the low average spend and high churn rates, customer support has to be scalable to service SMBs, especially if the goal is to scale to millions of advertisers.
Even if you spend $1 million a month, it can be almost impossible to get someone at Facebook on the phone to help. Instead, it uses scalable solutions such as knowledge bases and online training, which are far more cost-efficient and profitable compared to humans on phones.
Another challenge with creating an SMB-accessible ad platform is that it also invites many low-value and risky advertisers into the system. To mitigate these risks, resources must be invested to create scalable and robust ad-quality systems. Even Google and Facebook struggle with this.
Business model choices
Using cost-effective customer acquisition strategies, building scalable services and support and managing churn are all difficult challenges, but with the size of the SMB market you would expect more DSPs to try to overcome them and create a viable competitor to Google. That they aren’t comes down to decisions around their business model.
Every DSP is attracted by the promise of huge campaign dollars from large brands and their agencies. Securing these campaigns, however, requires a DSP to build an infrastructure to support corresponding needs.
This generally means having large service organizations, providing credit terms, adding custom product features and the like. These are all expensive to build and maintain. However, such an infrastructure doesn’t translate to the needs of SMB customers, so it cannot be reused nor supported by SMB customers’ lower per-customer revenue contribution. Instead, DSPs must build a separate organization to profitably attack each market.
Given the limited resources of most ad tech players, combined with the desire to achieve fast revenue growth, it is unsurprising that most choose to focus on the enterprise.
To be sure, some DSPs do initially target the SMB market. However, once the product meets the needs of larger customers, they try to get upmarket as quickly as possible to enjoy lower churn rates, higher lifetime values, smaller support structures and less stress. But such an organization looks very different than one designed to support the SMB market.
The SMB market was abandoned
Facebook’s and Google’s dominance is unsurprising. DSPs and other ad platforms have effectively conceded the SMB market to them, instead competing for brand and agency dollars.
Despite the attraction and benefits of having millions of small customers, it’s incredibly difficult to create a scalable customer acquisition machine, a scalable support system and a robust ad-quality department. The churn rates associated with smaller customers can also be brutal and unfeasible for companies that want to grow revenue quickly and efficiently. It becomes next to impossible without a business model dedicated to dominating in this space.
The fact that no company currently stands out as a scaled challenger to Google and Facebook in the SMB market might indicate that there is still an opportunity in the space.
On the other hand, it might also indicate that the war is over and that ad tech players have ceded the SMB market to the likes of Google and Facebook, as well as smaller players such as Twitter and LinkedIn.
Follow Ratko Vidakovic (@ratko), AdProfs (@adprofs) and AdExchanger (@adexchanger) on Twitter.
This post was syndicated from Ad Exchanger.