How the economic hype cycle is impacting Retail Media
This is the first in a series of pieces I am going to write on Retail Media, which I think is a fascinating space at the moment from an asset and market pricing perspective.
Over the last week I was asked about Retail Media by a senior journalist. It was a fascinating discussion. The quandary we’re looking at is the explosion in spend leading to a reduction in ROI. Essentially, as the media asset became more popular and used it reduced the ROI. The question is, why?
A little known concept in MROI is how important cost is
ROI has quickly become a proxy for effectiveness in the media world. By and large most media channels are mature so this tends to hold (broadly) true. At a publisher level in particular, ROI that’s higher tends to indicate a better asset or audience. Lower ROI indicates the opposite.
But one of the increasingly important factors to watch (particularly in turbulent economic times) is cost. Cost, more than anything, can play a key and influential role in what ROI actually ends up being.
Let me explain. Say you’re spending $1,000 on an ad and it’s generating a $3,000 return. That’s a 200% ROI. Pretty good, right? But suddenly… everyone cottons on to your strategy. Everyone realises that the asset generates returns! People start hyping it in the trade press. And before you know it, the asset costs $2,000.
Suddenly your ROI on that asset has dropped to a measly 50%. That’s over a 150% drop! If you’re in the MROI game, nothing has actually changed in the effectiveness of the asset. Instead the cost of the asset is what’s driven the decreased performance.
What marketers should understand is the economic cycle of media
What this cost cycle represents is an economic cycle. Typically the economic cycle of a new media asset looks like this:
Initial launch: asset is launched, probably with not much audience and poor ad formats.
Product maturity without market maturity: the ad format itself is mature and effective but the market hasn’t caught up.
Early adoption: key players in the market begin to buy the format and the price starts to increase.
Market hype: the asset is hyped, everyone piles in and the cost skyrockets often to unsustainable heights.
Market maturity: the asset stabilises and finds equilibrium and relatively stabilised pricing.
Market saturation: if the asset has programmatic pricing, the price is slowly bid up against the operating margins of competitors within the market.
For most marketers you basically want to operate away from point 4, and watch carefully for point 6 (meaning at point 6 you better be watching ROI like a hawk). In this sense, as a channel comes to market, it’s not really about “is this channel good?”. You also need to consider the economic cycle that the asset is likely in.
Smart marketers get an advantage when they can spot a mature ad product that has yet to find advertiser market fit
With all marketers and media mavens, this is ultimately what you want to do. By being able to spot an ad format that works and being first to it, you ultimately get access to highly effective assets at prices the market has valued unders.
That’s a winning strategy. It’s also, to my mind, where most media strategy should be focused.
(Co-incidentally this is why I am such a big fan of Ben Shepherd, Chief Investment Officer at Dentsu Media - he always thinks this way)
You actually gain real and financial advantage when:
You buy innovative and effective media assets early
You’re willing to take risks buying assets (e.g TikTok now)
You’re actively divesting from assets that are at their most hyped
It’s why it’s so important to actually be creative in your media strategy. It’s the only way to find advantages outside of messaging and other tactics.
Which leads us to Retail Media and where it’s at
I’m a huge believer in new media innovations and Retail Media is no exception. Except when I’m asked about it’s value for ROI, it’s a hard one to place. I believe the massive hype cycle it is currently in will drive the price to unsustainable heights in the coming year.
This isn’t a new phenomena. We’ve seen similar in a range of media assets like Instagram, Facebook, YouTube and Search to name a few. But right now we’re seeing an explosion in spend in Retail Media as the conventional “billboard in a shopping mall or local grocery store” is rebranded into a highly valuable asset.
That explosion in spend will, inevitably, lead to overinvestment and saturation at some point in time. Our own Mutinex data suggests that we’re not close to that point yet — but I do believe Retail Media is at stage 3 of the hype cycle, with a risk of entering stage 4 at some point this year (at least in Australia).
So it won’t surprise me if later in the year we see a slow decline in Retail Media ROIs and effectiveness. It won’t be because the underlying asset has changed. It will be because a hype cycle overinflated the price.