As we fully settle into the last quarter of 2024, the Ads Team here at Drive is seeing some worrying trends that are signalling to us that this year is going to be a particularly rough ride for anyone running digital ads.
Three reasons in particular are going to make a huge impact on driving up ad costs and, as an obvious consequence, lower ROAS:
- The “Temu Effect”
- The US Presidential Election
- Black Friday / Cyber Monday During an Economic Downturn
We’ll examine each factor in a little more detail below.
1. The “Temu Effect”
This is something that has actually been happening since late 2023 and an issue that our team has been flagging to clients and keeping a very close eye on.
In a nutshell, Chinese e-commerce giant PDD Holdings launched Temu as a brand to break into the Western markets. In particular, they have been spending hundreds of millions on ads to get their brand in front of would-be consumers (https://www.forbes.com/sites/cmo/2024/02/21/why-temu-is-spending-on-marketing-like-a-billionaire/).
The company has been particularly aggressive when it comes to the US market and has been gobbling up the digital ads market. Because Meta and Google platforms work on a bidding system, the result is everyone having to pay a higher price as demand outstrips supply.
The bit of good news is that the latest reports coming out of industry researchers shows that Temu’s plan is not working. Their cost-per-acquisition does not seem to be keeping up with their profit margins. This means that, while they may be gaining a huge flood of new customers short-term, in the long-run this strategy is not sustainable.
The counterpoint to this argument is that PDD Holdings is a Chinese-based company and that the Temu app might be some sort of government spyware. Take this information with a grain of salt as there is no definitive proof that any of this is actually the case, however, back in June of this year, a group of security researchers (Grizzly Research) compared the Temu app to straight-up spyware. (https://arstechnica.com/tech-policy/2024/06/shopping-app-temu-is-dangerous-malware-spying-on-your-texts-lawsuit-claims/).
Time will tell if this is a long-term problem or just a blip on the radar that will resolve itself as the company matures and settles down their growth phase.
2. The US Presidential Election
Although we’ve been around long enough to expect this every four years, we’ve noticed a steady increase in spending from political parties with each election cycle. This trend began after the Obama campaign team demonstrated the importance of online presence in the late 2000s.
As another contentious US Presidential election gets underway, user attention gets increasingly more expensive the closer we get to an outcome. Two separate reasons contribute to this:
- The Democratic and Republican parties have dedicated budgets to spend on digital ads, cutting into the market share
- People are distracted by the election and are seeking news updates, pulling consumer attention away from our clients
The latest projects show that more than $619 million was spent during this election cycle as of the end of August (https://www.brennancenter.org/our-work/analysis-opinion/online-political-spending-2024). We can only assume that this trend is only getting more intense as we near a November decision.
Unfortunately, there’s not much we can do other than wait out the temporary dip in performance.
During this time, from a content-standpoint, we also warn our clients to be particularly careful about their social media content so that they don’t accidentally make a political statement that may not have been intended.
3. Black Friday / Cyber Monday During an Economic Downturn
While we always see heavier than usual spending during this time, this year is going to be a little different.
Although economists are saying that consumer spending is up there are other factors to consider:
- Personal savings are down
- Disposable personal income is not keeping pace with consumer spending growth (https://tradingeconomics.com/united-states/consumer-spending)
These two factors indicate that consumers are being much more careful about what they are spending money on. Add on the inflation numbers from 2023 and it seems that, while people are spending more, they are spending on day-to-day essentials.
This means that our clients who are selling non-essential items and services are going to have a harder time generating sales this Black Friday / Cyber Monday season.
We’ve already seen a little bit of this happening with one of our apparel brands. While the number of orders is actually up, the average order value is down slightly. We also noticed that people are buying items such as socks and underwear vs t-shirts and sweaters. Another sign that, while people want to engage with our client’s brand, they are being pickier about their spending.
Conclusion
We’re heading into some rough seas ahead. As with anything to do with economics, this is the snapshot for this year’s Q4 but it likely won’t stay doom and gloom for long.
To end things on a positive note, the medium-term outlook is much brighter:
- Inflation seems to be coming down
- Interest rates have been coming down from post-pandemic highs
- Investment in the private sector is ticking back up
Given all of the above items, both negative and positive, this time next year will look very different.
