Why wasting a ton of money is the only way to build a challenger brand for the ages
Embracing the slow build of real brand power against the crack cocaine of performance marketing
For most, the equation looks almost too good to be true: sow pennies in Google or Facebook marketing, and harvest pounds in sales from new customers thus acquired with arresting simplicity. The digital power of performance marketing today (what the advertising moguls of the past might dismissively have referred to as “below the line” media spend) is such that many challenger brands apparently succeed with building handsome (and often strikingly profitable) businesses from the get-go with remarkable speed, and little need for capital. It all feels a million years away from the days when brands were built with slow, expensive and wasteful broad-reach media campaigns, where success was measured quarterly in incremental brand awareness points, as opposed to daily through the instant rush of CACs and LTVs. Most boards of digitally-native challenger brands don’t even bother measuring awareness these days, and almost all VCs will happily make investment decisions over $10s of millions on the back of CAC and LTV alone.
However, inherent in the blinkered focus on performance marketing as the core engine for growth lies a misunderstanding of how brands scale, and at The Craftory we frequently observe challengers hitting a wall and going ex-growth somewhere between the $30-50m revenue mark if they build their plans on deceptively efficient performance marketing alone. The way to avoid the growth trap is to pour increasing amounts, from early on, into the seemingly outdated and wasteful art of brand building – which counter-intuitively also requires bravely accepting diminished profitability and lower growth in the medium term as the price to pay for reaching true scale and longevity as a brand in the long term. What’s going on?
Every founder knows that the first step in building a challenger brand is to find product-market fit: proof that there is a sizeable enough pool of consumers ready to part with hard-earned cash to acquire the new product in question. No medium is more efficient at finding willing early adopters than Facebook or Google. Put a benefits-led ad before an innovation-susceptible audience, and the “buy now” button rings at speed with stunning efficiency. And so challengers can scale from nothing to millions in revenue, often in as little as a year or two, and never requiring more than a keen eye on cost per click, conversion ratios, and retention cohorts. The black boxes of Facebook and Google just busily keep finding more lookalike audiences to feed the performance ads to, and founders see no point in wasting even a dollar into uncertain, broad-reach and long-term brand marketing campaigns when that same dollar could immediately buy another profitable customer in performance marketing instead. The assumption is that the status quo conditions will prevail as the business scales, and so plans are drawn up (and VC money raised) on the back of trust in steady (or even declining) CACs, and the belief that performance marketing dollars will forever translate directly and efficiently into new acquired customers and revenues.
The trouble is that as brands scale, Facebook and Google CACs rarely hold steady, and never decline (those very rare categories where network effects come to play excepted). Instead, experience shows that the efficiency of digital performance marketing in finding more susceptible early adopters rapidly wanes above the enthusiastic first few hundred thousand customers, and founders instead find themselves nursing sky-rocketing CACs, deteriorating retention cohorts, and growth well below that promised to investors.
The reason for this is that early adopters, and consumers with a clear idea of the product benefits and differentiation they are looking for against existing brands, are a small minority that is quickly found (and exhausted) by Facebook’s and Google’s algorithms. For brands to break out into the mainstream and beyond the committed few, it requires the traditional funnel of awareness, consideration, trial and repeat to take place. Without awareness of the brand, what it stands for, and how it is differentiated from the incumbents, the bulk of consumers never consider, try or switch to the challenger. In other words, above-the-line brand marketing, slow, wide and wasteful as it might seem, is in fact the necessary enabler for challengers to scale.
Don’t take our word for it. For marketing scientists far and wide, from Byron Sharp’s “How Brands Grow” to Binet & Field’s influential “The Long & The Short of It”, econometric evidence shows that those brands that invest solely in below-the-line performance marketing deliver notably poorer growth than brands which balance traditional wide-awareness above-the-line brand marketing together with below-the-line performance marketing. And the science suggests a ratio of 60% brand, 40% performance spend is the optimum. That’s a far cry from the monolithic CAC and LTV focus so predominant amongst digitally-native challenger brands today.
Where to begin? Part of the challenge for founders is when to start the process of investing in wide-reach brand marketing. Unquestionably, doing so makes little sense for a nascent brand still in search of its product-market fit. However once that fit has been established – perhaps at a revenue runrate of $10-20M, the focus (and business plans) need to shift towards increasingly investing in awareness-driving brand marketing amongst the target consumer group. The way to do so, and to keep sight of spend and results at board level, is to split the marketing budget and associated measures in two: start with 20% ring-fenced and dedicated to brand marketing, and 80% to performance marketing, and adjust the ratios over time to 60% brand and 40% performance once revenues reach perhaps $100M or more. The KPIs to report against and track with equal importance should be brand awareness (unprompted and prompted), consideration and trial for the brand marketing spend portion, simply executed via online survey providers such as Attest, and the familiar CAC, LTV and retention cohorts metrics for the performance marketing part.
Of course, assigning budgets and measuring outcomes is the easy part. Just how to deploy brand marketing spend in a way that delivers results against incumbents with vastly greater budgets and decades of brand building experience, is the tricky bit. It requires developing unique skills that most digital challenger brands have little to no experience with, precisely because their performance-marketing-fuelled growth didn’t require them to: like how to find expertise and value in the creative agency world, how to be bold and single-minded enough to land an attention-grabbing campaign with true emotional punch (no quicker way to burn through brand spend with zero effect than if your campaign lacks cut-through or legitimacy) – and how to test creative options in an agile way before committing to that Superbowl moonshot. There’s a lot to take in, and doing so often requires bringing a brand-led CMO to join the C-suite and round out the prevailing performance-marketing expertise in house.
And even with deft execution, given that increases in awareness and consideration from brand marketing spend won’t immediately translate into new customers, running a balanced marketing book requires accepting that growth and profitability will be lower in the short term compared to simply placing all cash on performance marketing. That’s why a clear understanding of the dynamics at play needs to be a shared and agreed principle at board level – and why challenger brands will be wise to choose investors who understand brand-building deeply, and who know that “wasting” a ton of money on brand marketing, wisely, is indeed the only way to build an iconic and lasting brand for the ages.
Ernesto Schmitt is co-founder at The Craftory, the progressive investment fund on a $375M mission to back the world's boldest cause-driven CPG brands.
