Comment by Aurornis
11 hours ago
> The new business line will cost about $2M in software dev, and $3M for the new facility. The advertising budget? $40,000,000 (annual).
The reason the advertising budget is such a high number and a recurring charge is that effective advertising returns an ROI on each dollar spent.
If the software budget was increased 10X to $20 million, would the company get 10X as many customers? No.
What about the facility? If you 10X the facility budget to $30 million would you get 10X as many customers? No.
However, advertising is a customer acquisition activity. Every dollar you spend on advertising provides additional customers. This is saturable, but the ceiling is very high. Much higher than spending on software or facilities.
The reason your ad budget isn’t so high isn’t because Google and Meta invented the discoverability and distribution problems or basic economics. It’s because it has been determined that acquiring new customers via advertising has a high ROI and therefore it’s a smart move to pour as much money as possible into customer acquisition.
If every $1 you spend on advertising produces $2 in customer LTV then your company should be maximizing ad spend until evidence of saturation starts appearing.
This commonly frustrates engineers who think it’s a wasted investment. The question is: Compared to what? If you could have the same number of customers and same amount of revenue without advertising then you should do that! However, you can’t. This isn’t a licensing fee that’s being paid. It’s putting money into a machine that returns more dollars back than you put into it.
I doubt the ROI would be so high if organic results stood any chance.
The ROI on bribes is very high too, but we haven’t legalized those (officially).
> I doubt the ROI would be so high if organic results stood any chance.
This is just the same fallacy. In what world are people going to organically share ads for this company on their Facebook feeds? Who is going to Google the company name before they know about it?
Every business needs to proactively acquire customers.
Distribution and CAC are top of mind values for any growth business. It has been this way long before Google and Meta existed. Digital advertising actually makes it cheaper and easier than ever to acquire customers at scale.
A lot of people enter the company or product name into the browser's search field and reach their intended target through an ad at the top of the results. If they proceed to purchase something, does this count as a conversion? I think it does. Unlike traditional advertising, this didn't influence the customer's decision to buy at all.
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Information can travel without people paying for it do so.
Ban most ads and everything will still work fine.
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CAC-LTV by itself is not a great long term strategy. But it can appear like one in the short term to investors.
So there is a plethora of companies happily dumping investor money into paid customer acquisition.
Blue Apron was a classic example of borderline fraudulent growth metrics and a cash grab IPO before the customer acquisition funnel collapsed.
> Every dollar you spend on advertising provides additional customers.
If you’re just taking these customers from competitors, the marginal utility can be pretty low.
e.g. If you consider a world where there are no ads for cars, people aren’t going to meaningfully lose out of the utility they get from cars, carmakers simply avoid the prisoner’s dilemma of having to advertise as much as the next manufacturer.
The world isn't zero sum, advertising grows the pie for all involved. One of the best examples would be the iphone when it was released. Even in your example category of cars Tesla and later Rivian/Lucid/BYD marketing was a game changer for electric vehicles.
Very few ads are for products where exact 1:1 competitors exist (though it's nonzero, maybe something like a commingled Amazon Basics widget).
My point is that advertising can grow the pie, but it doesn't necessarily do so, and even if advertising is net pie-growing, it can still shrink the pie in specific markets.
For a more on-the-nose example than the arms race between car manufacturers, consider cigarette ads. If the ads simply convert smokers between brands, then it's basically zero sum minus the cost of the ads. If the ads convert non-smokers, then the ads are of significant negative utility taking their externalities into account.
> Very few ads are for products where exact 1:1 competitors exist
Sure, but also, I'd contend that few purchases are made based on ads informing consumers of meaningful differences between products. The products could be 1:1 duplicates, and the ads could be identical.
e.g. I just turned off my ad-blocker and fired up YouTube, the first four ads I see:
1. An ad for a multivitamin. Zero mention of any differentiating feature from a generic multivitamin.
2. An ad for a grocery delivery service. Zero mention of any differentiating features from any other food delivery service. (This one was a bit wild to me - this is actually service I already know and use, I'd never seen advertising for them, and this ad didn't mention any of the reasons anyone would choose to use them.)
3. An ad for some predatory-looking debt-relief service. Maybe not predatory, but no information about why that debt-relief service would be better than any other debt relief service.
4. An ad for a jeans company. I actually had to google this one to figure out what it was even an ad for, the ad just featured shots of people hiking in mountains and dunking into icy lakes without any mention of clothing.
I had this exact epiphany when I ran a side business selling niche widgets. Every dollar I spent on Facebook ads returned me $5 in revenue (at 40% margin) and it wasn't obvious how much I could spend before that stopped being true.
it surprises me how many people simply don't get the point. they say "they make more money this way, so it's ok". no big picture at all.
What big picture? Can you elaborate, or just snide drive-by criticisms?
I mean I understand that a lot of people in this comment section wish ads didn’t exist and that everyone just automatically knew about relevant products and services without ads, but it all reads like utopian fantasy stuff.
Do you genuinely believe the economy didn't function prior to the invention of the advertisement?
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That misses the point though. Google and Meta have designed systems which capture nearly the entire surplus. In a non-monopolistic environment you'd expect somebody to be willing to step in at a bit less than Google's rates and offer the same outcomes.
The parent comment did a sneaky thing and gave the advertising budget then pivoted into rants about Google and Meta. They never actually said “All of this money goes to Google and Meta”. It was just expected that on HN everyone would assume as much because that’s what everyone is familiar with.
In the pharmaceutical industry, I can guarantee their advertising funnel is much wider than two social media platforms. Think about all the places you see pharmaceutical ads: TV, billboards, even ads on buses, that sketchy doctor’s office full of company swag. That $40 million is not going all to Google and Meta even if the GP comment tried to imply it was.
> In the pharmaceutical industry, I can guarantee their advertising funnel is much wider than two social media platforms. Think about all the places you see pharmaceutical ads: TV, billboards, even ads on buses, that sketchy doctor’s office full of company swag. That $40 million is not going all to Google and Meta even if the GP comment tried to imply it was.
Having worked adjacent to ads... yes, there is more than social media ads. But the amount of everything not social media has massively shrunk!
Local newspapers are effectively dead except for local businesses (and even these are reducing their spend - especially the food delivery services fully rely on Uber, Just Eat etc) and so is radio, and even TV has been hit hard. You got newspapers and broadcast stations getting hit left and right, sliding into bankruptcy and/or being bought up by larger companies for pennies on the dollar. The fact that all across the Western world government/citizen funded public broadcasts are under attack makes it even worse, the diversity of media and, most importantly, the amount of people holding government accountable is collapsing as we speak [1].
Globally, Google, Amazon and Meta suck up over half of the global ad spend and it's not going to look better [2].
[1] https://lizfarmer.substack.com/p/how-the-decline-of-local-ne...
[2] https://www.marketingdive.com/news/global-ad-spend-rise-fast...
What's the spending distribution for pharma ads? Hypothetically, if $35 million out of $40 goes to Google and Meta, OP is still right.
They have all the control and no competition. The time for breaking these companies up or hamstringing them at least a little bit is many years past due.
The problem is that monopolies are extremely profitable and are as "American as apple pie," despite the prevailing healthy competition myth that goes alongside it.
This is very correct, the only thing I as an engineer care about is that we rigorously optimize our spend to get the best possible CAC (Customer Acquisition Cost) It’s an incredibly hard problem and has many variables, that’s why the platforms charge what they do, they allow you to work with these variables in a somewhat approachable way.