ASOS has acknowledged the performance marketing elephant in the room
Ben Shepherd
Advertising, marketing + Media. Subscribe to Signal. Currently building what's next.
The comments from ASOS CEO José Antonio Ramos Calamonte last week around the challenges the business is facing due to an over reliance on 'performance media' were the first real public acknowledgements of what is a huge problem from a CEO on the marketing challenges that the majority of the category is facing right now.
ASOS had been allocating 80% of its marketing investment (which for F22 was over 220 million pound) to performance media, and is in a situation now where the more the business scales the bigger the problem gets.
A crude analog for this approach is an athlete deciding to take steroids only until they're able to 'win', with the intent of once they're winning they'll be able to pull back from them and comfortably remain in the lead. But the issue is the reason they're winning is mainly the steroids, so without them they don't know how to. What's worse is, everyone can access the same steroids, so the way to keep winning isn't to stop taking them, it's to take MORE of them!
Calamonte is deciding to take on a critical business issue head on - ASOS's reliance on paying a middleman for traffic. His acknowledgement that the business has underinvested in brand marketing is shorthand for saying that the salience of ASOS in the minds of its target customers is insufficient, and as a result it has to spend most of its resources on renting customers from the large digital platforms.
Renting is a key term here, as it's not accurate to use the term 'acquired'. You're not acquiring customers if a large chunk of them continue to come through you via the digital platforms. And you're not acquiring them if the way to drive a sale more often than not is winning a bid against a competitor for a search term of piece of inventory.
As mentioned above, this is not an issue unique to ASOS. In fact, ASOS is one of the rare businesses publicly leaning into the challenge. Almost every online pureplay is facing these headwinds
Here are 7 charts from ASOS that demonstrate the issue. (all data is taken from the ASOS investor centre)
The red line shows ASOS is steadily growing total visits from 2016 to 2022, but as these visits increase, the cost per visit also increases. So as visits scale, the cost for each visit doesn't go down ... it goes up! The result, the bigger you get the more expensive it becomes just to maintain the status quo.
ASOS gross profit (revenue - cost of goods sold) has been tracking up (despite being flat 21 and 22), but since 2020 marketing investment as a percentage of gross profit has increased significantly, and in 2022 is at record levels. The bigger the business, the less efficient the marketing spend becomes. It's worth noting for some Australian online pure plays, marketing costs represent 30-40% of gross profit.
Total orders (red line) keep on increasing, but the marketing cost allocated to each order is increasing at the unit cost level. So not only is marketing becoming more expensive as the business scales, but at the unit level the marketing cost to obtain one order is becoming more expensive, not less.
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Marketing investment continues to rise, but net new customer additions remain consistent 2017-2021, and were zero in 2022. As the business scales, marketing investment becomes more and more significant just to maintain the same level of customers.
Total visits are increasing, but total visits over total customers remains the same. What this means is ASOS hasn't moved the needle in improving the ratio of visits to customers, and on average since 2016 this hasn't moved. So the business hasn't found a way to improve this visitation to customer ratio
Mean orders per customer has improved since 2016 (positive), but the cost to obtain each of these orders is increasing. Which suggests that a large proportion of these orders are purchased via a digital platform rather than front door customers. The cost per order has increased significantly since 2020.
ASOS has struggled to move the needle on average order size since 2016, but is facing significantly higher marketing contribution costs to obtain each order, particularly compared to 2018-2020. Customers are spending about the same, but the marketing cost to drive it is much more.
Untangling this issue is going to be delicate. There's a lot of complications to be considered. Firstly, it is very hard to reverse a reliance on rented customers. Move too fast and you risk driving customer volume off a cliff (even if they're unprofitable) and all the flow on effects. Move too slow and you compound the issue created by the reliance.
If you rebalance the media and marketing mix, will the business (and shareholders) have the patience to wait for the benefits that come with effective brand building. These are not going to be short term, they're likely to be 1-3 year investments.
ASOS by acknowledging the issue to shareholders is making a clear signal it's committed to solving the issue. As the business has scaled, ASOS has not received the theoretical marketing benefits that come with scale (rusted on customers, better economies of scale, lower marketing ratios), it's received the opposite. A higher reliance on renting customers, worse economies of scale, and higher marketing ratios. And they're not alone, this is a category wide issue.
ASOS should be applauded for calling it out. And I look forward to seeing how they solve it.
Newly admitted Australian lawyer | Data privacy & emerging technology nerd | Former data-driven marketing specialist
2 年Few problems with ASOS that haven’t been mentioned. As a customer of ASOS who shops purely organically I can tell you their return rate would be through the roof. That’s going to make their performance marketing and any LTV metrics look much worse than the graphs they have shared outside the business. Further than that, they have a serious problem with the quality of their housemade brands which I would say colloquially amongst young woman is the driving reason for so many returns and for what may be increasing poor brand perception. IMO from working at a major fashion retailer, you can fix some of this with marketing theoretically but the product team also needs to come to the table to fix the underlying problem.
Executive Coach | Corporate Trainer | Expert in Critical Conversations | Board Member Horse Shepherd Equine Sanctuary
2 年Always interesting Ben. Something I’d never considered. I tend to avoid the ads when I’m searching for a specific company it’s often the easiest route to a website. Am I understanding the graphs correctly - the average customer visits the site about 100 times a year and purchases 2.5 times? If I read that correctly, there’s a huge amount of window shopping, which they are paying for?
Chief Executive Officer at Bullfrog | 24' Independent & Victorian Agency of the Year | 30 Under 30 Entrepreneur of the Year
2 年Great article, Ben! Natalie Xenos
Digital Marketing Director | Digital Director | Performance Director
2 年Great article Ben. I really enjoyed it. It will be interesting to see if they can overcome the challenge of their brand being a synonym for 'spend thrift'. Humans seem to first seek out what they truly desire, then work back from there.
General Manager Client Strategy and Solutions VIC SA & WA
2 年It is no surprise that customer acquisition (or whatever we name it) becomes more expensive for performance to deliver over time. Low hanging fruit early, followed by genuine competition for what is left, and that costs. But beyond this, the focus on short-termism at the expense of brand building continues to haunt marketers. It's an extremely hard balance for CMOs to strike when they are under increasing pressure to deliver quarterly (if not daily) growth. Performance works most effectively when coupled with brand building, and of course performance has a role to play in building brand, but without a balanced approach to both this and to growth, the long term is shaky. And expensive.