For small online retailers, digital advertising has become more expensive

Justin Ho Feb 16, 2023
Heard on:
When Apple’s do-not-track option launched in 2021, it had an outsized impact on smaller businesses trying to advertise digitally. Josh Edelson/AFP via Getty Images

For small online retailers, digital advertising has become more expensive

Justin Ho Feb 16, 2023
Heard on:
When Apple’s do-not-track option launched in 2021, it had an outsized impact on smaller businesses trying to advertise digitally. Josh Edelson/AFP via Getty Images

In 2021, Apple announced a new feature of its mobile operating system that allowed users to opt out of being tracked. The update gave consumers who use iPhones and iPads the right to withhold the details of their online lives — for instance, whether they’d just been browsing luggage or waffle towels — from marketers.

Many consumers lauded the update as a win for user privacy. But Apple’s do-not-track option is just one of a few trends in digital advertising that are having an outsized impact on smaller businesses.

In 2018, Taylor Ruotsala started a business called Never Stay Stagnant, which sells journals that people can use to keep track of their productivity. The idea was to market the journals to people on social media.

“As a new business, I would say 98% of my traffic was from Facebook and Instagram ads,” Ruotsala said.

During the pandemic, the business took off. Ruotsala said the success was partly because a lot of people became more interested in self-improvement while they were stuck at home. 

But it also helped that Facebook’s ad platform helped her target exactly the customers she had in mind.

“Facebook was able to be like, OK, this girl — she’s 35, she just went through a divorce, she’s struggling, she just changed her Facebook status, she absolutely needs something that’s going to help her improve her life,” Ruotsala said.

That changed when Apple started allowing users to opt out of tracking. The update made it a lot harder for Ruotsala to precisely target that just-divorced 35-year-old. In order to find potential customers, she had to put her ads in front of way more people.

“It made it a lot more expensive to serve my ads to my correct demographic,” Ruotsala said.

As a result, Ruotsala pulled back on ad spending. “I just wasn’t profitable at all,” she said. “I was losing money every single day. So I pulled back completely at the end of the year.”

There’s another factor at play that’s hitting online advertising by small businesses: bigger businesses.

Over the course of the pandemic, big companies’ ad spending went up, according to Rick Bruner, head of insights and analytics at Standard Media Index — a company that tracks what large companies spend on ads.

“It did contract in 2020, but then it overcompensated in 2021, and it grew a little bit more in 2022,” Bruner said.

That growth pushed the cost of advertising higher, said Andrew Lipsman, principal analyst at Insider Intelligence.

“Ad markets in digital are marketplaces, and they’re auction-based, and so it is really driven by supply and demand,” Lipsman said.

Digital ad prices went up anywhere between 20% and 50%, he added.

“And that completely changes the bottom line for a lot of brands whose biggest costs often were digital advertising costs,” Lipsman said.

Another factor that may be increasing the price of advertising, at least according to the Department of Justice, is Google. Last month, the Justice Department sued the company over its ad platform, which connects advertisers to publishers of sites where the ads are displayed.

“One of the alleged misbehaviors is that Google abuses its market power because it has a very, very dominant position in this market for online display ads,” said Florian Ederer, an economics professor at Yale School of Management.

A big issue, the Justice Department said, is the roughly 20% commission Google takes when marketers buy ad space on its platform. Google said the Justice Department lawsuit “misrepresents” its ad business.

Big advertisers can avoid paying that commission by working directly with publishers, Ederer said. But smaller advertisers and publishers would have a much harder time doing so.

“You would have to contact many, many different other parties on the other side of the market, and that’s costly,” Ederer said.

More recently, online ad prices have been falling as big marketers have cut back on spending, according to Insider Intelligence. But a lot of smaller businesses don’t have a choice but to keep spending, no matter how much ads cost.

“Right now we’re keeping it constant,” said Sophie Blake, who owns a jewelry company.

Late last year, Blake shut down her brick-and-mortar store in Virginia and went online. That changed her whole approach to marketing.

“When you’re in physical retail, you can have that conversation with a customer,” Blake said. “They will open up to you and tell you, ‘Hey, this is what’s going on in my life. I’ve gotten an exciting promotion, and let’s celebrate.’ But on an [e-commerce] platform, it’s really hard to do that.”

Blake said she needs to advertise to bring in new customers, especially on social media.

“You can actually directly message your customers, they directly message you back, they leave you likes, or they save the content,” she said. “So that’s how you know that they’re engaging with you and you know that there’s interest.”

That’s the kind of information Blake is looking for — and the information she used to get by talking to customers face to face.

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