Here's a weird contradiction.

Performance marketing lets you efficiently target and convert potential customers without the crippling costs and wastage of traditional TV and mass-media channels.

However, performance marketers haven't been too successful in creating large, profitable brands.

8 out of the Top 10 Fortune 500 companies in 2021 were founded before the internet was created, and have built their brands over decades of advertising.

But for every McDonalds, Coca-Cola, and Apple, there are millions of smaller startups and businesses that pass through the murky waters of fame and fortune before silently sinking into obscurity.

Summary

  • Most businesses can’t afford to build a big brand through mass media, and have to use lower cost performance advertising instead
  • The auction system that runs performance marketing has a fatal flaw that makes it impossible to keep CAC costs from increasing unsustainably in the long-term
  • This gives big brands an unfair advantage, because digital-only advertising isn’t as effective or profitable

So if performance marketing is supposed to be a more effective and affordable way to grow, why isn't it creating any powerhouse brands?

The secret of growing a big brand

Big brands understand something you probably don’t: that most people are future customers.

If that sounds trite, really think about what it means.

Most of the customers you will gain in the lifetime of your business currently don’t know you exist, and aren’t aware that the product or service you’re selling is something they need.

Future customers make up 95% of most consumer markets

“Up to 95% of business clients are not in the market for many goods and services at any one time.”

Professor John Dawes
Ehrenberg Bass Institute

Big brands really get this, and grow by chasing both current and future customers at the same time.

Big brands can reach current and future demand.

They reach everyone by advertising on mass media channels like TV and Print, which are still the most profitable forms of advertising.

TV and Print delivers 89% of all advertising-generated profit.
Sources: 1) ‘Profit Ability: the business case for advertising’, Nov 2017, 2) Ebiquity ROI campaign database (Feb’14-May’17) & Gain Theory. Campaign obs: 1,954

This means that big brands profitably convert existing demand today while building a pipeline of future customers for tomorrow.

This also gives big brands a huge unfair advantage, because mass-media advertising is really, really expensive.

So what do most smaller brands do?

In order to compete, they make an often fatal mistake…

Performance marketing’s fatal flaw

Because they don’t have millions to spend, most businesses double down on performance marketing—ads where the purchaser doesn’t pay unless there’s a measurable result.

This has fuelled the rise of digital advertising giants like Facebook, Google, and countless other networks that promise marketers a better bang for their buck.

Performance marketing platforms include Facebook and Twitter ads, Google Ads, Amazon ads and TikTok
Performance advertising promises businesses measurable results

On the surface, their claims make sense.

Performance ads are:

  • Affordable: Lower advertising costs compared to traditional mass media 
  • Targeted: Ads are only shown to potential customers or specific audiences
  • Measurable: You see exactly what’s working (and what’s not) in real-time

But there’s a big problem with performance marketing…

It can never build a big brand.

Why?

Because performance marketing has a fatal flaw - bidding.

Auctions and bidding wars

All performance ads work on an auction-based system. You bid on keywords, clicks, or impressions against everyone else, and whoever bids the most wins.

That means these ads “touch” the consumer at the point of need, when they actively declare an interest in something.

Performance marketing can only work when the consumer signals their interest in a category, service or product.

Because the consumer’s interest is declared publicly, competition at that moment is at its most intense. The result is that the cost of attracting an audience at that point is at its maximum (avg. CPC is $5-10).

Funnelling your entire media budget through a bidding process also increases your exposure to external factors outside of your control:

  • Bid inflation via competitors
  • Bid inflation via structural changes (e.g., Google switches to automated bidding)
  • Other ad campaigns in market that reduce the performance of yours

The CAC Valley of Death

Since the economics of performance marketing can quickly become unsustainable, it’s very hard to rapidly scale a brand using this technique alone.

That means performance marketing can only reach the small number of people actively shopping at any given time, and you end up fighting over a small number of active shoppers like rats in a barrel.

Performance marketing can only target in-market shoppers, which leads to increased competition and higher advertising costs

This competition leads to skyrocketing advertising costs.

Once current demand is exhausted, performance marketing traps you in spiraling acquisition costs that quickly become unsustainable.

And you get trapped in the CAC Valley of Death.

The CAC Valley of Death

In other words, the auction system forces performance marketing to deliver short-term results at the expense of future growth. 

This is one of the reasons why so many companies cannot scale profitably.

Allbirds“… has yet to record a profitable year. While it aims to become profitable, Allbirds warned that it may not do so in the near future.” - Modern Retail
Dollar Shave Club“Had sales of $152 million in 2015 according to Unilever, but the business reportedly wasn’t profitable at that point, almost five years after it was founded.” Camino Financial
CasperNet losses of $67.4 million in 2019, after losing $93.2 million in 2018 and $73.1 million in 2017.
Outdoor Voices“Continues to lose money on customer acquisition as it struggles to broaden its audience.” Business of Fashion

“It's never been easier or less expensive to start a business, but it's also never been harder to scale one.”

Neil Blumenthal
CEO, Warby Parker

Outsmarting the competition

So… what can smaller brands do?

How do you convert today and create demand for tomorrow if you can’t afford mass media?

To answer that question, download our full report, How to build a big brand on a small budget, to learn how to fight back against the big brand bullies and start scaling profitably.

Topics covered include:

  • The secret to building a big brand
  • Why most brands fail to grow
  • How to get TV/mass-media results on a digital-only budget
  • How to supercharge your marketing campaigns for the best ROI