Age of discretion: D2C brands show caution in ad spends

Direct-to-consumers (D2C) companies, who have had an aggressive marketing strategy and have been sponsoring big-ticket properties like the IPL, gaming tournaments and TV shows, have become rational with ad budgets while keeping a close watch on every dollar spent.

Earlier, their spending was mostly to build a brand or for vanity or to impress investors. Now, their focus is on Return on Investment (ROI), much like legacy companies, say industry leaders.

According to experts, personal care, fashion and gaming brands are now relying on a mix of brand building and performance marketing, whereas fintech start-ups are staying largely focused on performance marketing.

“Some of them have cut down on their marketing budgets by not hiring celebrities for brand endorsements. Some have withdrawn from costly sports sponsorships. They are now spending money only to earn money,” says Sahil Shah, President - Digital Experience, Dentsu Creative India.

Case in point - crisis-hit BYJU’S roped in Shah Rukh Khan for an annual fee of close to Rs 4 crore in 2017. The seven-year-long relationship is set to end this year with sources saying that the edtech start-up may not renew the deal.

It is to be noted that BYJU’S and some other startups like Paytm and MPL exited from their IPL sponsorship deals midway after finding it unviable.

“For most D2C brands, the trade-off is often between growth and profitability. With decreased valuations (multipliers) on these models and pressure on margins, most brands are operating with a focus on bottom metrics, but this varies from a brand’s lifecycle to lifecycle,” noted Abbhishek Chadha, EVP – North & East, Interactive Avenues, the digital arm of IPG Mediabrands India.

Tier 2 and Tier 3 markets are key growth areas for a lot of D2C brands, especially in categories like health, wellness, and premium luxury.  Here, a lot of impetus is also placed on leveraging influencer marketing and vernacular content effectively, Chadha noted.

Echoing the sentiments, Shveta Singh, Chief Digital Officer – Motivator, says, “D2C brands are not spending as indiscriminately on visibility now. They thrive on a diet of Google, Meta and marketplace spending as a base to drive ROI.”

Indian startup ecosystem

Today, India is home to the third-largest startup ecosystem globally after the US and China, going by the number of startups and unicorns. Many of them are among the top 50 advertisers in the country.

Since 2014, annual VC funding to Indian startups has grown eight fold, from $5 billion in 2014 to $42 billion in 2021. India’s unicorn population has also grown from 6 to 105 until H1 2022, according to an analysis by Inc42. However, the country has not had a single unicorn joining the ranks in the last six months.

Though venture capital (VC) and private equity (PE) firms raised more than $18 billion worth of funds to invest in Indian startups in 2022 but they remained largely wary of investing, another Inc42 report says. A senior executive of a VC firm, said, “Investment into Indian start-ups is down 75 per cent in the first quarter of 2023. The freeze is visible across the board — from early-stage funding to late-stage funding. Even funding rounds have shrunk in number. It may pick up again during the H2 as inflation and economic headwinds are easing out globally.”

Smart moves

Citing a case study by D2C skincare brand Dermafique, the Interactive Avenue EVP said, “By bringing together the best of both worlds, our scalable framework enabled Dermafique to educate their target audience effectively, deliver sequential communications, and drive growth. They were able to boost CTR by 460%, drive 6.8X more orders, and achieve 9.6X higher revenue.”

Sequoia-backed personal care brand Mamaearth invested heavily in sponsorships of TV shows like Bigg Boss for brand building during the pandemic. Co-founder Ghazal Alag herself appeared in the first season of the reality show as one of the 'sharks'. After all, tier 2 and smaller markets amount to half of their business.

The start-up gradually pivoted towards performance marketing to drive growth and scale its customer base at a low marketing budget. It also decided to shut down some of its entities like Momspresso and MyMoney, which were acquired in 2021.

“To reach mothers, the brand worked with celebrities and popular online content creators. It expanded its digital campaign strategies by promoting its mobile app, creating weekly flash sales that customers could look forward to, and reaching and retaining high-value customers. With value optimization solutions, Mamaearth optimized campaigns that targeted high-value customers and, as a result, earned a higher return on ad spend,” as per Mamaearth’s success story shared by Facebook in a series.

“One of the biggest oversights we think a brand can make is to ignore the low-hanging fruit”, says Sujata Biswas, Co-Founder at the women’s ethnic wear brand Suta. Biswas explains, “For instance, since we are a Mumbai-based brand, having a large billboard on Bandra’s busiest street would give us the visibility every brand needs, but at a significant cost. Instead, we have installed small directional boards on lamp posts in Santacruz East, where our store is located. These boards direct customers to the Suta store and raise awareness about the brand at the same time.”

Suta is more insistent on cultivating relationships with influencers, stylists and celebrities who are fans of our brand, rather than focusing solely on paid collaborations with the most coveted names. Being approachable, accessible and developing personal bonds can often result in more successful collaborations, Biswas adds.

However, some startups like CRED still largely focus on brand building. “The company initially targeted wealthy individuals and created a community called Cred Club. Today anyone with a credit score of more than 750 points can get access to the facilities of Cred and be a part of its club. As of now, it is targeting Gen Y,” writes Aditya Shastri, Lead Trainer & Head of Learning & Development at Indian Institute of Digital Education (IIDE), in his article.

All of the current marketing activities of Cred are curated around seeking the attention of GenY, between 25-40 years, hence they have roped in brand ambassadors like Rahul Dravid and Madhuri Dixit, not a Virat Kohli or Alia Bhatt, Shastri points out.

Every penny counts

According to Shveta Singh, D2C startups are typically brands built digitally first. They approach brand building bottom up with more focus on maximizing performance marketing. They start using top-funnel advertising and mass media like TV much later in the lifecycle to scale up. While digital spends are always on, mass media advertising is usually events (read IPL) or based on the seasons (festive).

“Legacy companies, on the other hand, continue to prioritize mass media and top-of-the-funnel advertising. The digital spends for these companies has grown significantly over the years and hovers between 25-45%. The economic downturn has pushed them to cut down the spends in the first half of 2023, but the cut is by and large across the board, unlike D2C brands,” Singh noted.

The last few years have seen D2C brands growing phenomenally in India – fuelled by the pandemic and the surge in digital adoption. But in the post-Covid era, the focus has returned to brick and mortar and pivoted to omnichannel presence and experiences, Chadha says.

“Alongside legacy metrics like Reach and Frequency, D2C marketing also takes into account other relevant and detailed metrics like Customer Acquisition Cost (CAC), Advertising Cost of Sales (ACOS), Lifetime value (LTV), Average Order Value (AOV) etc. While tech sits at the heart of the D2C ecosystem, we have found that a framework combining manual campaign efforts with cutting-edge automation helps target distinct cohorts, direct consumers’ attention, and drive conversion”, he noted.

The entire D2C backbone depends on consumer data and data-driven marketing, which cut across the omnichannel universe and play a critical role in effective, efficient marketing.

“When we peel the layers of an omnichannel strategy, the most important aspect that emerges is customer experience. Since product discovery and research are now mostly happening online, the entry point to a brand/product must be avant-garde, especially for start-ups. Customer experience is not just limited to UI/UX, but specifics like hassle-free return and exchange policies, convenient payment options etc. Hence it is critical for startups to leverage innovative tech and platforms like Shopify/Magento/Woo effectively to deliver seamless commerce,” Chadha further explained.

Instead of celebrities, most brands are collaborating with influencers who are affordable and drive better sales than film stars or sportspersons, say marketers.

Kumar Awanish, Chief Growth Officer, Cheil India, echoes the sentiments. “Many startups are either expanding their portfolio or expanding to new areas or revising their logistic management strategy. Such companies are spending more than before yet taking different and cautious approaches,” Awanish added.

Swati Nathani, Co-Founder and Chief Business Officer, Team Pumpkin, has a different point of view.

“Startups are definitely more open to experimenting with newer ways to market than legacy companies. However, legacy brands are now following the startup D2C brands in terms of marketing innovations. Besides, some D2C players who just wanted ROIs earlier, now seek a strong branding story as they have understood the importance of awareness campaigns.”