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Scaling a Niche – How Direct to Consumer Brands Can Boost ROAS

This post is the first in an ongoing series that examines emerging trends in the commerce category following our updated suite of products and services for digital commerce companies

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Overview 

The Direct to Consumer Brand (DTC) category has exploded in recent years. Led by savvy marketers, businesses in this space are effectively growing massive customer bases with a high average CLV by knowing their audience and exploiting the Facebook/Instagram ad platform. 

 

The Direct to Consumer model (also called Digitally Native Vertical Brands or Startup Consumer Brands) was adopted by companies such as Warby Parker, Dollar Shave Club, and Bonobos (the latter two have since been acquired thanks to their astronomical success). Andy Dunn of Bonobos, beautifully lays out what makes them unique. I encapsulate a few key points below:

 

  • They cut out the retail middleman (brick-and-mortar or digital)
  • They deliver an exceptional experience from acquisition through fulfillment (digital, packaging, loyalty)
  • They enjoy high contribution margins (around 65%) and have predictable CLVs

 

Challenges

These qualities have helped make paid user acquisition on Facebook and Instagram a cornerstone of the category’s success. Although marketers in the category are being lauded for their achievements, the space is not without it's challenges.

 

DTC brands rely heavily on efficient user acquisition and predictable growth. Once a brand reaches a certain level of maturity, marketers find that their target audience becomes saturated, CAC starts to rise and ROAS begins to take a dip.

 

At times, that downturn in ROAS may be ignored or accepted as a reality of the business because cushy contribution margins and a healthy average CLV keeps the metric in an “acceptable” range.  However, if the trend isn’t addressed early it can accelerate and become a real problem that puts the business at risk.

 

How to scale a niche audience

 

The good news is that Facebook and Instagram hold unexploited potential that can be uncorked by focusing on one key principle: scaling a niche audience.  

 

The terms “scale” and “niche” may seem like competing concepts, but it’s more than likely that you’re already designing your acquisition strategy with this idea at its core.

 

If you are building lookalike audiences from a seed audience that includes your most valuable users, you are doing exactly that. Your “niche” attribute is “high value users” and Facebook’s use of its algorithm to identify profiles with attributes that correlate with your “high value” users is the scale.

 

If you are using broad targeting and then relying on an algorithm to refine over time, your niche attribute is whatever event you are optimizing for (purchases, subscriptions, etc.) and you’re relying once again on the algorithm scale.

 

At Appnique, our approach to scaling a niche audienceis to first analyze (using machine learning and AI) the attributes of an audience based on behavior they exhibit in the app store, on the web, and in first party data provided by our customers to identify a niche and mapping them to precise interests on Facebook and Instagram to reach broader audience to deliver scale.

 

All three of these approaches to scaling a niche audience work exceptionally well compared to other paid UA tactics (though we might argue that the money spent upfront in a broad-targeting approach could be more efficiently used). We would argue that none of them, however, are sufficient on their own.

 

Every targeting tactic has its limitations. At some point, it reaches the point of diminishing returns. The question becomes how to use multiple approaches in a complementary manner.

 

How to maximize ROAS on Facebook and Instagram

Keeping CAC low and CLV high is the goal for every growth marketer and imperative for success in the DTC category. As we showed in the previous section, the paradigm for doing so is scaling niche audiences, but how is that accomplished? There are 3 fundamentals to consider:

 

Segment experiences

A niche audience is really a proxy for high value users that have an affinity for your product. People have affinities for different reasons and therefore there are multiple “niche” attributes that you should optimize for. However, with every discrete niche, there should be an experience tailored for that audience. It’s your media’s job to reach a high value, high affinity audience, but it’s creative’s job to inspire action. The degree to which you leverage insight to deliver a better experience dictates how efficiently you acquire the right customers.

 

Eliminate overlap

As you scale your total addressable audience, it is important that you eliminate overlap between your segments as much as possible. Too much overlap and you’ll be competing with yourself for inventory.

 

Unfortunately, the risk of “double-targeting” a limited set of potential customers leads some marketers to stick with what has worked even as CAC starts to rise. To avoid opportunity costs associated with not using a variety of complementary targeting tactics, enlist a 3rd party toolset to visualize your audience for each tactic. Appnique’s Facebook Interest Diagnostics allow you to view your audience segments in relation to one another so you can focus on building complementary audience segments for your next campaign.

 

Optimize before you spend

Facebook has done a beautiful job of offering marketers powerful tools to automatically optimize targeting as a campaign runs. However, over relying on automated optimization after a campaign is launched can be inefficient. Complement Facebook’s powerful algorithm by beginning with a more qualified audience to begin with. Interest audiences are a great proxy for affinity and when used in combination with Event Optimization, can be a powerful tool for improving ROAS.

 

Work with Appnique

Find out if high affinity audiences are what you need to complement your existing campaigns and improve ROAS. Learn more about our approach to working with Direct to Consumer brands and schedule a free demo of our offering. 

 

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