B2C Startups and the Pitfalls of Performance Media

B2C Startups and the Pitfalls of Performance Media

The risks of building an acquisition strategy focused 100% on Google and Meta - and the paths to creating a sustainable growth perspective

By Renato Mendes *

Imagine a startup called XYZ. You don't know it, but you've probably heard a story similar to theirs. A Brazilian B2C company, with brilliant founders who have just completed their first institutional fundraising round with tier 1 market funds.

. Of the amount raised by XYZ in their funding round, about 30-40% will go to paid media (Google and Meta) focusing on acquiring new customers;

. XYZ’s leadership is confident in this strategy since their LTV/CAC ratio in a 12-month retrospective period is above three, and their bet is that this ratio will improve even more moving forward with (i) a reduction in CAC (Customer Acquisition Cost) through economies of scale in the acquisition dynamics and (ii) an increase in LTV (Life Time Value) projected with recurrence and cross-selling;

. With cash on hand, the company invests in people and tools, but the bulk goes to media spending. After a few months, however, things don't go as planned. The CAC not only does not decrease but actually increases. The forecast of LTV growth is not confirmed either. The team seems unable to find alternatives;

. To get to the next fundraising round strongly, the founders decide to deliver the number of new customer acquisitions even with a worsening LTV/CAC quality. The decision has a negative impact on the company's financials. In practice, it means a higher cash requirement, increased losses, shortened runway, and therefore a need to anticipate the round.

. XYZ's leadership simply cannot explain to their investors why their predictions did not materialize, causing some of them to lose interest in the company. Eventually, they complete their round but, worse, they cannot solve the issue of acquisition through paid media and enter a vicious cycle that is the graveyard for many startups: raising money, paying more and more for new users, incurring losses, and needing to raise more and more money to keep the wheel turning.

Okay, XYZ doesn't exist (of course!). But we could put several startup names here, and the story would change very little. Unfortunately. The fact is that the lack of understanding of the dynamics of acquisition through paid media is probably one of the main reasons why tier 1 VCs are increasingly passing on B2C company deals in the country. They are not willing to transfer income to Big Techs. What founders need to understand is that building a 100% paid media-based acquisition strategy is unsustainable in the long run.

The fact is that the lack of understanding of the dynamics of acquisition through paid media is probably one of the main reasons why tier 1 VCs are increasingly passing on B2C company deals in the country

Important note: this does not mean that the so-called bottom-of-the-funnel media is the villain of this story. On the contrary, it works and is necessary for consumer-facing companies to grow. It's the misuse that is the problem.

To understand what we are talking about, let's determine three assumptions that will guide our entire reasoning:

1. In the short term, acquisition through paid media can be quick, "cheap," and therefore efficient;
2. In the long run, it is not scalable and has a "ceiling," making it unsustainable.
3. In between (preferably from the beginning), it will be necessary to compose this acquisition strategy with other unpaid lead generators that can balance this dynamic.

Short vs. long term

Before getting into the details, here's a fact to help you understand the context of this market: for the first time since 2014, the combined market shares of Google and Meta in the United States will be less than 50%, according to a report from Insider Intelligence. In practice, we have been living in a duopoly for almost two decades.?

What is the impact of this on startups? First, an inflation of media costs that often approaches or exceeds 100% per year. Second, the game of acquiring digital customers has become synonymous with the ability to technically operate the tools of these companies above any other skill.

The vast majority of startups begin by allocating most of their performance media resources - and, again, that's okay because this strategy is efficient at the beginning. This is because their first users are those for whom their offer has the most value. This initial batch of people willing to try your product/service is the easiest to find and capture online. Hence the better conversion and lower CAC.

The problem is that this initial group has a limited size, and at some point, this strategy runs out. Then, you need to expand your target audience to try to maintain performance. This expansion of reach with similar results will be sustainable for some time, but not forever. You vary creatives, alternate formats, expand regions, but at some point, the ads stop working.

The new groups are less responsive to your message. Studies from Uncover, a media measurement solution, indicate that most Brazilian B2C startups start to show signs of exhaustion from an investment of BRL 6 million/year. Of course, this varies greatly from company to company, sector to sector, but the fact is that, at some point, the ceiling is reached.

In addition to the target perspective, another aspect that will hinder your acquisition strategy is the competition. They will not only copy your business model and product, but also your ads, messages, formats, and landing pages. All of this will increase your CAC because the ads will lose performance, and the most common keywords will have more expensive bids.

Another relevant aspect here is that the percentage of organic customers at the beginning is proportionally more significant overall, which lowers the average CAC. Gradually, however, it loses relevance as the volume of paid leads increases. Soon, your average CAC will resemble that of paid origination rather than organic, meaning it will be worse.

That is why analyzing data from this first cycle and projecting (even with improvements) for subsequent months is the first mistake a startup can make because these numbers will not be sustainable in the medium term. They are only an estimate. Trust us, the first batch of customers for a startup is always the easiest and cheapest, but it won't be like that forever.

Unpaid media

Why wait until what we call the "patient in the ICU," totally dependent on paid media, to start acting? The smartest move is to try, from the beginning, to balance an origination strategy that combines paid media with unpaid formats. We're talking about initiatives like branding actions, SEO, community building, and commercial partnerships. Don't underestimate the capability of these actions; they can make a difference in your business's financial health.

It's essential to know that the later you try to escape the paid media trap, the harder it will be. So, the day to start is today. Not that unpaid media origination is easier. One of the challenges here is that they don't have the immediate response speed that an Instagram campaign has, for example. It takes time to build and patience. Nothing happens in SEO in less than six months. At the same time, if paid media is fast in generating leads when you increase investment, it is also quick to stop working when you decrease it. It's like putting your foot on and off the accelerator of a car.

That's why the best solution for better performance is always a combination of channels. Again, paid media is not the villain of this story. The problem is its indiscriminate use. In the next article, we will explore another aspect of performance media strategy exhaustion: the need to expand the media mix with investments in middle and top-of-the-funnel media.

In conclusion, relying solely on paid media strategies, particularly Google and Meta, can lead to unsustainable growth for B2C startups. Founders must understand the dynamics of acquiring customers through paid media and balance their approach with unpaid media initiatives like branding, SEO, community building, and commercial partnerships. By diversifying their marketing efforts, startups can create a more sustainable growth perspective and avoid the pitfalls of over-relying on paid media channels.

* Renato Mendes is a co-founder 4equity - Media Ventures , Latin America's first independent Media for Equity fund

This article was originally published at our Newsletter in Portuguese. You can find it here https://4equitymv.substack.com/?