The Changing Ad Landscape (and What To Do About It) | Youssef Ahres (Flagship, Instagram)
How builders can grow and retain customers in a world where, on the internet, privacy is here to stay
Welcome to the second edition of the Steelhead Builder Series.
This week I have the pleasure of writing about a conversation I recently had with Youssef Ahres, founder and CEO of Flagship. Flagship enables creators to sell products from brands they love directly to their audience via Flagship managed stores and tools - allowing creators to earn a living, brands to reach more customers, and followers to easily purchase creator-recommended products.
Before starting Flagship with co-founders Juhana Kangaspunta and Khalil Hajji, Youssef spent 5 years at Instagram, most recently as a Director of Data Science. At Instagram, Youssef became an expert in ads, and he has since carried over those learnings to his work leading Flagship.
In this post, we’ll discuss a brief history of ads, why Meta and Google won, the changing ad landscape, and how founders and operators can position themselves to win in this evolving environment.
A brief history of ads
The first known advertisement dates back to 3000 BC, discovered on a sheet of papyrus amongst the ruins in the ancient city of Thebes in Egypt. In the intervening 5,000 years, there have been several meaningful changes in the way that ads are distributed, from printed posters & flyers to newspapers, radio, and television. However, none have been more impactful than the most recent paradigm shift in ad distribution, digital advertising.
Digital advertising spend has eclipsed other forms of advertising spend in recent years because it provides a solution to the age-old adage in advertising: “Half my advertising spend is wasted; the trouble is, I don’t know which half.”
Specifically, the creation of cookies, pixels, and other tracking technology has allowed advertisers and ad platforms to show targeted ads to users and report on the return of those ads. Generally speaking, neither precise targeting nor precise ad performance data were available before digital advertising, thus resulting in the unfortunate (and inefficient) reality of the pre-digital advertising era, made clear by the often-cited adage above.
In my conversation with Youssef, he mentioned an interesting point - advertising serves a very specific purpose: to match supply and demand. He went on to say that in a world lacking in abundant supply, while there is value in advertising, there are fewer options for consumers, and therefore less of a need to rely on ads to match the available supply to the demand. Said differently, the value in the value chain accrues to the creator of the supply in a world lacking in abundant supply. However, shift gears to a world of supply abundance (e.g. there are likely hundreds or thousands of brands in any consumer category today), and the value in the value chain accrues to the parties that can help properly match supply and demand.
💡 Advertising serves a very specific purpose: to match supply and demand. In a world of abundant supply, the value in the value chain accrues to the parties that can help properly match supply and demand.
Initially, the solutions to the problem of matching supply and demand were print, radio, and TV advertising. However, as stated above, more recently advertisers have turned to digital advertising to solve this problem.
Why Meta and Google Won
No one doubts that Meta and Google have thus far won the digital advertising war. They did this by being the best at matching supply and demand. Let’s quickly explore how they became so adept at this not-so-simple task.
First, they had to build products that were widely and frequently used. Much easier said than done, but both Meta and Google own some of the most used consumer applications on earth.
Next, they invested heavily in technology to allow them to display the right ad to the right person at the right time. This involves tracking technology (cookies, pixels, APIs) to understand who users are, sophisticated tools for the creation of ads by advertisers, machine learning software to display ads optimally, and systems to scale to billions of interactions.
By doing this effectively at scale, advertisers were able to generate healthy returns on ad spend (ROAS) and thus continued to spend to acquire customers. The ad platforms, meanwhile, benefitted massively from this ability to match supply and demand, as evidenced by Meta and Google being two of the seven most valuable companies on earth, totaling nearly $3T in market cap as of this writing, and growing remarkably over the last 10 years.
While they’ve won the ad war to date, changes are afoot in the dynamic advertising landscape. This time, rather than being driven by a platform shift (as in from TV → digital) the changes are being driven by an increasing emphasis on privacy. As Youssef said during our conversation, “Privacy is here to stay”.
The Changing Ad Landscape
According to Youssef, pixels and cookies were widely adopted around 2013/2014. Their widespread adoption coupled with improvements in machine learning algorithms led to vast improvements in Meta’s and Google’s ability to display the right ad to the right person at the right time. This made advertisers and ad platforms happy and wealthy.
However, not long after, a cultural shift was underway. Between 2018 and 2021, the Cambridge Analytica scandal surfaced, the Netflix documentaries The Great Hack and The Social Dilemma were released, GDPR and the CCPA were put into effect, and the cultural meme “If you aree not paying for the product, then you are the product” widely circulated.
In 2021 the most substantial blow yet was dealt by Apple - who leaned heavily into the zeitgeist of the moment and made privacy a core value of theirs - via the introduction of their “Ask app not to track” update. A staggering ~75% of iOS users select “Ask app not to track” when prompted, meaning nearly overnight advertisers and ad platforms lost the ability to track many users on their iOS mobile devices.
While a win for consumers who care more about privacy than personalized experiences, the effect this has had on advertisers and ad platforms has been significant. According to Youssef, this caused an advertising recession as advertisers no longer knew with certainty the value that they were getting from their ads, leading to a meaningful reduction in ad spend.
While Meta has recovered some of what they lost through probabilistic measurement, it’s not the same as a more deterministic model. This change also impacted Google, though less than Meta, because Last Click Attribution (via ClickID) isn’t as affected or considered privacy-unsafe. And Google tends to be the last click before the purchase, by virtue of being a search.
In addition, Google has begun phasing out 3rd party cookies in Chrome, which will further limit the ability of advertisers to properly target users with relevant ads.
More evidence that, in Youssef’s words, “Privacy is here to stay”.
How To Win In This Evolving Environment
A germane question at this time is, given this, how should founders and operators, whose jobs involve customer acquisition and revenue growth, operate to win in this increasingly privacy-centric world?
Youssef had several ideas for founders and operators building consumer products:
Collect and leverage first-party data to the greatest extent possible
Become an expert in customer engagement and retention
Add channels and optimize across them
Spend more time building a strong brand
Collect and Leverage First-Party Data
Youssef mentioned that most companies have more first-party data than they think they have. And if they don’t have much, they should consider collecting more to the extent permitted by their company’s privacy policy (or they should edit it to allow for more collection). Keep in mind that while third-party cookies are on the way out, first-party cookies will continue to be an extremely important tool to help companies understand who their users are and provide excellent customer experiences.
First-party data includes but is not limited to:
Data in your customer relationship management (CRM) system, including names, emails, phone numbers, and more
Data from your website, app, and social media accounts
Data from product-level purchases
Data from your subscription-based emails
Data from customer surveys
Data from customer feedback
Data from your loyalty program
We won’t go into detail here on how to set up systems to collect all of this data, but once it’s collected, it’s a good idea to centralize all of this data in a Customer Data Platform, like Twilio Segment. From your CDP (or equivalent) you can then make use of this first-party data via marketing campaigns, advertising campaigns (yes, this first-party data can help you with more targeted advertising), customer retention efforts, and more.
Become an Expert in Customer Engagement & Retention
Once you have the above built out, you will be able to use it to engage and retain your customers in different ways.
Youssef says it best, “Once you’ve acquired a customer, it’s on you to maximize the lifetime value (LTV) of the customer you acquired. And the best way to do that is by leveraging protocols where you can deterministically reach out to them (Emails / SMS / Push). The funnel is basically that you acquire a customer and then, once acquired, the customer is passed along to a different team / product area.”
The first is email. There is a reason we all receive so many emails from companies that we engage with - it works. Just as ads work best when they are hyper-targeted, the same is true for emails. The best companies will leverage the first-party data they collect on their customers to send the right email to the right customer at the right time to encourage a desired action. To achieve this, consider a product like Braze, which allows for advanced segmentation and trigger-based emails.
The second is push notifications. If your product has a mobile application, you will want to first make sure that your customers have it downloaded. Next, well-timed and relevant push notifications can drive high volume and high-quality customer engagement and retention. Take Hopper for example, where they shared that 80% of their sales are triggered directly from push notifications.
The third is SMS. You may be surprised to learn that SMS open rates are 98% vs. 20% for email. It should be no surprise then that SMS can be a powerful channel to engage and retain your customers.
💡 Once you’ve acquired a customer, it’s on you to maximize the lifetime value (LTV) of the customer you acquired. And the best way to do that is by leveraging protocols where you can deterministically reach out to them (Emails / SMS / Push).
Add Channels and Optimize Across Them
In a world where you can no longer rely only on Google and Meta for healthy customer acquisition, you need to be comfortable experimenting with new channels, adding those that work, and then optimizing spend across them.
As I was drafting this post, I came across the below tweet from Connie Chan, GP at a16z, which clearly states that fighting these ad changes requires finding new distribution channels.
Youssef mentioned a few channels he thinks might become more relevant as we enter this new privacy-first era of customer acquisition. I’ve listed them below:
Co-Branding
Other ad platforms like Snap, TikTok, Pinterest, and Twitter / X
Partnerships
Creators
Direct Mail
Out of Home
Each company is different and will have its own core set of channels that make sense for them. The key activity here will be experimentation. The best companies will rapidly identify potential scalable channels where their customers exist; test those channels for key performance metrics like CAC, ROAS, and LTV:CAC (you can and should measure each of these by channel); and then add those that are performant to their steady-state channel mix.
The next step will be optimizing spend across those channels. To do this, it’s critical to have a robust system in place to be able to view accurate, near-real-time data about channel performance metrics. In a future post, we’ll deep dive into how to set up this per-channel data infrastructure and analytics tooling.
💡 The best companies will rapidly identify potential scalable channels where their customers exist; test those channels for key performance metrics like CAC, ROAS, and LTV:CAC; and then add those that are performant to their steady-state channel mix.
Spend More Time Building a Strong Brand
Exactly how a strong brand can help combat the decreasing effectiveness of ads in a privacy-centric world may not be immediately obvious. However, if you consider the medium and scale of ads, you can see how it may not be critical to have a strong brand to generate a positive return on ad spend in a world of near-perfect targeting. Companies could easily get away with optimizing for a transaction instead of a long-lasting customer relationship (LTV).
Moving forward, brands will need to leverage their brand identity to attract and retain an audience organically. A recent example of this is Duolingo who has built a strong presence on TikTok, growing to a staggering 8.9M followers in only 2 years.
How they did that has been well documented by Rex Woodbury and Sprout Social, with one of the key findings being that their success on TikTok is strongly linked to their brand - the crazy owl.
There will be a follow-up deep dive into how to build a strong brand, but for now, it’s important to note that brand matters even more in the current environment.
As Youssef rightly points out, “It’s critical to be able to reach your customers and build a long-term relationship based on your company values and offerings.”
Summary
In a world where privacy is here to stay, the best companies will learn to rely less on Meta and Google for customer acquisition. Instead, they will leverage first-party data, become experts at customer engagement and retention, experiment their way to an optimal channel mix, and build strong brands.
In addition to achieving sustainable growth, companies who can pull this off will find that they’ve built a more defensible and less fragile business. A business that can thrive on its own merits, that is not reliant upon one or two partners to achieve its ambitious growth goals.
At the end of my conversation with Youssef, I asked him what I ask each of my guests, which is what his Steelhead goal in life is. That is, something that’s really hard, takes a lot of time, but will be well worth the effort.
I loved Youssef’s answer. He said it was to:
Provide access to opportunity for people around the world. Everyone has their own story to tell, their own passion, and everyone should be able to build a business off of it. I strongly believe that the world is better off with more people defining their own futures and living off of their passions.
I couldn’t agree more. Thanks so much for your time, Youssef.
If you want to get in touch with Youssef, you can find him on LinkedIn here.