With an uncertain economic outlook, digital brands are forced to make tough calls on whether to cut back on marketing at the expense of growth or continue to spend and accept lower profits. [What Happens When Digital Brands Have to Cut Back on ...- BoF]
- Digital brands are once again tasked with constructing a new guide for how to market and scale their businesses while protecting profits.
- Many digital startups will be less willing to experiment on channels they can’t easily measure returns on.
- A subset of digital brands still plan to increase their advertising this year.
Proper Cloth is preparing to dust off its pandemic playbook.
The online menswear brand had temporarily cut its marketing spend by 40 percent early in the pandemic, when demand for its custom dress shirts and suits plummeted. Advertising ramped back up again as offices gradually reopened; by last year, the budget for promotions was back to the pre-pandemic level of around $4 million.
But with more economic turbulence forecasted for the year ahead, Proper Cloth is once again preparing to pull back. Only this time, the focus is on trimming more expensive forms of advertising rather than across-the-board cuts. Among the channels facing the chop: podcasts, product catalogues and TV commercials, which combined represented more than 10 percent of its marketing budget for much of the last five years. The hope is that the change will help Proper Cloth maintain its profits in the event of a downturn.
“In Covid, we saw huge disruption to our business,” said Seph Skerritt, the company’s founder and CEO. “Going into 2023, with all these sorts of wild variables going on in the world and global conflict, what if something happens that causes things to slow down for us in a big way this year?”
After rebounding from the pandemic, digital brands are once again tasked with constructing a new guide for how to market and scale their businesses while protecting profits, as the old playbook of raising outside funding to proliferate ads on social media has fallen out of favour.
They face a tough choice: cut back on marketing and likely sacrifice growth, or continue spending to acquire customers, potentially at the expense of profitability. Many are choosing the first option: online subscription retailer Stitch Fix, for one, is expected to slash its marketing spend by around 40 percent in 2023, according to estimates from investment bank William Blair.
Proper Cloth, which has been EBITDA profitable for the last 12 years, is chasing a 25 percent year-over-year revenue increase in 2023, down from 27 percent in 2021. Skerritt said the company will adjust its marketing plan as the year progresses and, if necessary, protect profitability at the expense of growth.
“If we grow nothing this year, we’ll be fine. If we grow 10 percent this year, we’ll be fine,” Skerritt said.
Making Cuts and Rethinking Channels
Slashes to marketing spend have an undeniable effect on a company’s sales growth: After digital marketplace Revolve, for example, reduced marketing by 5 percent in the third quarter of 2022, sales increased only 10 percent, compared with a 27 percent rise in the previous quarter.
Slower growth isn’t always a bad thing, if it’s planned. Warby Parker, for one, cut its marketing spend by 26 percent in the third quarter of 2022, and sales growth slowed, down to 8 percent from a 14 percent uptick in the previous quarter. But the eyewear maker managed to reduce its year-over-year losses by more than $60 million.
Many digital start-ups will be less willing to experiment on channels where they can’t easily measure returns. Meanwhile, they’ll ramp up on safer bets like Facebook and Instagram, which have fallen out of favour with some brands in recent years, but where the line from ad spend to sales is clearer.
“We are seeing cuts in marketing spend. We are seeing marketing shifts at the same time,” said Polly Wong, president of marketing firm Belardi Wong. “We are seeing a push and pull in the marketing mix.”
Proper Cloth, for example, plans to divert more of its budget from what the company calls “offline channels” like podcasts and commercials to Meta and Google.
“We never could prove that [offline channels] was providing a good return,” Skerritt said. “For every dollar we spend, we can get [two] times as much on Facebook and Google.”
Brands are also paying closer attention to how much money they make on the sales that come from social media ads.
In 2023, online clothing seller Pact plans to get a return on ad spend of $1.80 for every dollar it invests in paid marketing on Facebook and Instagram, up from its usual $1.50. Doing so will help it increase its profits on the first order of a customer that visited the site from an ad on either social media platform. Pact has been promoting its higher priced items, such as its bundled underwear, to increase the AOV on the sales that come from its Facebook and Instagram ads.
“The way we’ve survived is spending money on what [we] can measure. That’s more true in this environment, " said Brendan Synnott, Pact’s founder and CEO. “You cut stuff you know is not going to help.”
Pact is divesting from other social media platforms that yield lower returns on ad spend, such as TikTok, where the company has generated only 50 cents on each dollar it has invested.
Its growth rate might drop this year as a result. Synnott said the company is chasing 30 percent year-over-year growth to around $100 million in sales in 2023. Pact’s sales have grown at around 50 percent year-over-year for the past four years, he said.
Growth Still Matters
A subset of digital brands still plan to increase their advertising this year. Some will do so to lure in customers that may have returned to physical retail, while others will eye higher sales growth to help fund their business expansions.
The online eyewear retailer Eyebuydirect, which sells its own frames and styles from brands like RayBan and Oakley, is upping its spend on brand awareness marketing, such as a 30-second video focused on the company’s selling features like free two-day shipping and virtual try-on, in order to attract new buyers. In 2022, the company raised its spend on these campaigns by as much as 20 percent, and it will go up more this year.
Eyebuydirect is already profitable, though prioritising revenue could chip away at that margin. It’s a sacrifice it is willing to make to secure more business.
“We are planning for lower profitability as we try to grow long term and amplify our brand,” said Branden Maes, a senior marketing manager at Eyebuydirect. “It is something we are doing strategically.”
Leather goods label WP Standard also plans to increase its investment in Facebook and Instagram advertising this year to fund hiring and product line expansion beyond supple leather bags and wallets. Founder Ryan Barr said the bootstrapped brand, which generates less than $10 million in annual sales, hopes to see sales rise by 30 percent year-over-year to help it get there.
“In order to do that and be self-financed, you need to grow the business,” Barr said.
Still, Barr wants to preserve what he can of WP Standards’ EBITDA profits, and is open to cutting back on Facebook and Instagram ads if they don’t lead to higher sales, a move he attributes to the unstable marketing landscape for digital brands.
“A few years ago, there was a playbook. There was a much clearer path to growth,” Barr said. “I don’t think there’s a clear path now.”
