For the first time in its history, Facebook announced it is losing users. At the end of last year, the company reported that the growth of new users had ceased. Despite its efforts to remain relevant amidst growing competition, Facebook has slipped as the dominant social platform. So what does this mean for local market advertising?
For global brands, the impact won’t be felt immediately. Facebook still has billions of global users. Its treasure trove of user data remains a viable revenue opportunity for the company and a valued asset for advertisers. However, on the local level, the story is a bit different.
The past four years have seen a sharp decline in the overall effectiveness of social media marketing for local businesses, both in organic and paid reach. It has become more expensive to reach a local audience. Most small businesses have made few, if any, attempts to utilize paid marketing, opting instead to focus on content creation, which remains ineffective for converting followers to customers.
Still, the myth persists that content is king and that companies should continue to turn out content several times per week to keep followers engaged. The fact is this strategy is time consuming and not cost effective for businesses whose target audience is limited to a small geographic (i.e., local) area. Facebook’s algorithm simply does not have enough statistical data to deliver content effectively at a small, local level.
Even with paid promotion, the only objectives that produce reasonably good results are Awareness and Reach, not Leads or Conversion, which are what most businesses expect from their social media investment. The cost of paid promotion has increased from around $.20 per view two years ago to more than $1 per view. For many small businesses, the thought of paying $3,000 for a four-day ad run to reach a fraction of users in a five-mile radius isn’t money they are willing to spend.
The Cost of Customer Acquisition
Many business owners have never taken a course on marketing nor do they really understand the how and how much of acquiring and retaining customers. Typically it costs much more to attract new customers than it does to retain them. Customer acquisition cost refers to the average amount spent to acquire a new customer. To calculate this cost, add the amount spent on marketing and divide it by the number of customers acquired during a specific time range, such as a year or a fiscal quarter. But how much is the typical cost to acquire a new customer?
The prices below represent the amount of advertising/marketing dollars needed to acquire one new customer using paid online advertising.
Across All Industries: $49.86
- Advocacy: $96.55
- Auto: $33.52
- B2B: $116.13
- Consumer Services: $90.70
- Dating & Personals: $76.76
- e-Commerce: $45.27
- Education: $72.70
- Employment Services: $48.04
- Finance & Insurance: $81.93
- Health & Medical: $78.09
- Home Goods: $87.13
- Industrial Services: $79.28
- Legal: $86.02
- Real Estate: $116.61
- Technology: $133.52
- Travel & Hospitality: $44.73
These numbers may seem outrageous to a small, local business, especially if the average price of your products is less than $50.
Another way to determine what to spend on marketing is to compare the customer acquisition cost to the Customer Lifetime Value (LTV), in other words, how much profit will you make from a single customer over their lifetime compared with how much you spent to acquire that customer.
A ratio of 1:1 means you lose money the more you sell. A good ratio is 3:1. Based on the industry average above, a local business would need to spend nearly $50 to acquire a new customer. If you expect this customer to spend $100,000 in their lifetime (e.g., over 20 years), $50 to acquire that customer is worthwhile. But if your customers typically spend less, the cost to acquire that customer using online advertising may be too great.
If you take the organic route—in other words, you hire a marketing agency at $500 per month to generate content for you on social—you could still be spending more than the lifetime value of any customer you’d acquire.
These results illustrate that neither paid nor organic social reach makes sense for many local businesses.
One size does not fit all
Admittedly there are exceptions when it comes to considering the overall effectiveness Facebook offers at a local level. There is definitely value in using Facebook to stay top of mind for products or services that relate to a large customer base, such as a restaurant. You want people to think of your business when they are hungry or making plans for dinner. Many other business types fall into this category.
An easy way to figure out where you should be spending your marketing dollars is to answer one question: Is what you offer a “need” or a “want?” “Wants” are things that do not require immediate action. For example, a person may “want” a pair of pants, but in most situations, they do not need to purchase those pants right now. This is where top-of-mind marketing is beneficial. If you keep producing content or ads related to pants, your company will come to mind when a person is ready to buy, which increases the chances of you getting the sale.
“Needs” are things people need right away (or reasonably soon); for example, a water pipe breaks, and a person needs a plumber. In these instances, people turn to Google to perform a search, such as “cheap plumber” or “plumber near me.” If your business falls into the “need” category, search engine optimization, Google advertising, and Google Business reviews should be the areas of focus.
Many businesses can be both a need and a want. In these cases, a combination strategy is useful:
- Maintain a social media presence by generating relevant content
- Monitor your company’s reputation, and
- Invest in SEO and Google Ads to stand out from local competitors.
So what about Facebook?
Many people continue to believe that social media marketing is free (or should be free). It isn’t. Facebook used to be a cost-effective way to make people aware of your business. For the local market, it has become increasingly difficult because:
- Local markets aren’t growing.
- Local markets are losing customers.
- Global brands have more money to dominate the ad space.
The Facebook newsfeed is already overrun with ads. Every third post is now an ad. The same is true on Instagram. While abandoning all presence on Facebook is not advisable right now, it’s time to start exploring other options.
What are the alternatives?
Most small businesses place too much emphasis on new customers and not enough on existing ones. While adding new customers is often seen as a sign of growth, turnover is also an important measure to consider. If you lose as many customers as you gain, you aren’t growing.
A smarter move for local businesses is to shift focus to existing customers and find ways to encourage repeat purchases by offering incentives, coupons, loyalty programs, and other perks. As previously mentioned, it is less expensive to retain customers than to acquire new ones.
Marketing requires a four-step approach: awareness, interest, consideration, and conversion. Trying to convert people who are not familiar with or only marginally familiar with your company is an expensive, uphill battle. This is where social can play a part—making people “aware” of your business. Repeat exposure to your messaging is important for brand awareness, but the expectation that awareness alone will lead to sales is short sighted at best.
One of the most effective means of marketing is thru email. Despite all the naysayers who claim people have lost patience due to the deluge of messages, the truth is email still produces a higher conversion rate than any other form of marketing—especially as it relates to current customers. Your customers are already interested in your product/service. Informing them of sales and incentives via email encourages future engagement. In addition, segmenting and targeting customers allows you to deliver stronger, more personalized messaging.
Short-form video is the new kid on the block, but it’s complicated and time consuming to create, and not every type of business will benefit from it. Nevertheless, savvy local businesses should consider shifting resources to produce some video content, even if it’s distributed on Facebook for the time being. YouTube and TikTok are solely video platforms, but it is much harder to reach a local audience. Information must have broad appeal, be entertaining, or become viral to get noticed.
It’s also prime time to consider other forms of marketing, such as press releases, direct mail, print advertising, and promotional opportunities, such as event sponsorships. Even a local church bulletin can be a better opportunity for small businesses than Facebook is right now.
Facebook isn’t going away anytime soon, but preparing now for the changes to come is in the best interest of every business.
For any marketing strategy to be effective, small businesses need to set aside a reasonable budget if they want to pursue online marketing, regardless of the platform. According to the U.S. Small Business Administration, companies that make less than $5 million a year should allocate between 7% and 8% of their revenues to marketing. In other words, if your company brings in $300,000 a year, $21K-$24K should be used for marketing.
Unfortunately, most local businesses typically budget less than $10K, which explains why marketing, in general, isn’t working for them. If you are serious about developing a marketing strategy for your business, having a budget to support one is essential, especially if you need to hire an agency to help you.
Whether Facebook is a viable channel for your business depends on your expectations. It’s a good way for people to become aware of your business, but it remains challenging to convince people to buy from you.