The True Addressable Market for Digital Advertising

How digital advertising competes with rent, headcount and other forms of spending

Hi friends!

There has been a lot of talk about the shift towards new models of monetization for consumer software products away from advertising. While the rise of these business models is good, what’s gone under-appreciated is that the market for digital advertising continues to grow swiftly. It is also a lot larger than one might think and may take share away from other forms of spending not typically thought of as advertising, which is what I’ll go into today.

I’ll cover:

• The Digital Ad Market Today

• Competing With Other Forms of Spend

• Closing Thoughts

The Digital Ad Market Today

In 2020, despite the pandemic, the digital ad market in the US grew 12-15% y/y to over $150B, accounting for over 60% of US media ad spend, as in the chart below.

The approximate market share breakdown today as follows¹:

• Google: ~30%

• Facebook: ~23.5%

• Amazon: ~10.5%

• Others: ~36%

What’s interesting is that while it is true that each of these companies is all competing with each other for share, in an absolute sense, all of them are growing, including most of the companies in the “Others” category such as Snap, Pinterest, Etsy, Wish, Twitter, Spotify, Uber Eats, Doordash, Instacart, Zillow, etc.

A lot of that growth in the last decade was largely based on a mismatch between time spent and ad dollars spent across various non-digital and digital channels as illustrated below, which as of 2-3 years ago has normalized and gotten in line as budgets shifted to desktop and mobile.

Source: BOND Internet Trends 2019

Now, a basic view suggests as screen time continues to grow and efficiency continues to grow on digital channels, they will outpace the growth of the other media advertising channels and take share away from them. But the idea that digital advertising competes only with other forms of media advertising (Print, Radio, TV) is a bit simplistic.

Competing With Other Forms of Spend

Digital advertising also competes with rent, trade spend, and spend on headcount among other things.

In that sense, the TAM for digital advertising is likely a lot larger than one might think.

Let’s go into how.

Rent

Commercial leasing is a ~$175B/yr industry and a fair portion of it can be viewed as competing with digital advertising.

The adage “CAC is the new rent” is pretty popular these days and for good reason.

Direct to consumer brands that got started without physical storefronts have shown that digital advertising across search, social, and display can be an effective substitute for spending on rent, among other things for most CPG categories.

And it’s not just direct to consumer brands. All companies that offer eCommerce as a channel, at some level, can make an allocation decision between spending on rent and opening a store and spending on digital advertising.

In fact, sometimes the decision could also be between the size/location of the store (do I open a big/expensive store?) or a small store and spend more money on digital channels.

It perhaps isn’t a surprise that 25% of malls are expected to shut down in the US over the next 3-5 years².

Depending on the type of brand they are, if they choose to spend on digital advertising, that spend could be used on:

• Ads on Facebook or Google properties if they have their own eCommerce infrastructure/use Shopify

• Ads on Amazon to show up higher in search results on Amazon if they sell on Amazon

• Promoted Listings on Etsy if they sell on Etsy

• Leveraging Farfetch’s media solutions for higher visibility to Farfetch’s customers as a luxury brand.

• Or some mix of the above.

Note that advertising isn’t a direct substitute for all of the rent, because typically to participate on platforms such as Amazon and Etsy, companies end up paying a take rate as well (usually 15-20%). But if they want even more sales on the platform, they can spend incremental money to advertise rather than increasing their physical footprint.

Consider this quote from Alibaba CFO Wei Wu about Alibaba’s take rate in light of the take rate of rent for most brick and mortar businesses of 10-15%.

Currently, our take is somewhere around 4%. This is mainly where merchants paying for the sales and marketing, branding services were provided. So even in this sole area, we still have a lot of potential.

On a similar note, even for restaurants, digital advertising can compete with rent. Restaurants, which typically paid ~10% of sales on rent, today have the option of replacing or complementing their physical footprint with online ordering and pick-up.

While DoorDash and Uber Eats take ~5-15% take rates on the pickup and delivery orders which competes directly against rent, restaurants that have spare labor capacity also have the option of advertising on these platforms to drive incremental orders and revenue rather than say opening a restaurant / paying more for rent in a higher trafficked location. In some sense, DoorDash and Uber Eats ads spend can substitute for getting a lease in a busy location.

Below are some examples of ads these different platforms allow for, from an earlier piece I wrote.

Trade Spend

Trade spend refers to the money that a vendor or manufacturer spends to get a product onto the shelves of retail stores and sell it in-store. It’s typically ~10-15%³ of revenue for CPG companies corresponding to a ~25B/yr market, and encompasses spending on:

• slotting fees

• coupons

• in-store discounts and promotions

When retail was the primary purchase channel and most purchase decisions were made in-store and shelf space and in-store pricing made a big difference, trade spend was critical to do well. Now, however, with the rise of digital platforms, digital advertising can serve as a substitute for some forms of trade spend.

For example, spending on Amazon’s search ads (or Amazon coupon ads) is a direct replacement for slotting fees and coupons in the trade spend for many product categories.

Similarly, if consumers are shopping for groceries online, then Instacart ads become a more effective form of shelf-space to pay for (aside from the bare minimum needed to be slotted in that store).

Instacart pitches this as one of the value propositions of their ad products, noting:

Easily and conveniently claim prominent shelf space in the digital aisles of 350+ retailers and 25,000+ stores on our platform with one campaign

Ads on Instacart

Headcount

Digital advertising also has the ability to compete with spending on headcount, particularly marketing and salespeople.

For context, just in terms of “sales spend”, there are over 2M sales representatives across product and service categories in the US, who combined account for ~$195B in wages.⁴

Consider spending on digital ads vs traditional media buying. Yes, expertise is still needed and many companies still use in-house personnel and agencies, but compared to traditional media advertising, digital advertising tends to be more self-serve, easier to scale, more automated, and does not require as many phone calls and going back and forth negotiating with vendors. It generally allows for more leverage on time spent compared to other media ad channels, which means they need less personnel per dollar deployed.

Also, consider inbound marketing and other similar methods for lead generation. Inbound marketing typically leverages content marketing often combined with digital advertising. It replaces some of the need for top-of-funnel cold-calling and lead generation, which is typically performed by salespeople, with spend on digital advertising and personnel creating content.

In this way, digital advertising partially reduces the need for sales and marketing personnel.⁵

Even in B2B contexts, digital advertising can compete with salespeople.

Take the trade show market, which is a $16B market. Brands often spend a lot on salespeople, booths, travel, etc to be at these trade shows to reach distributors or retailers.

With the advent of marketplaces such as Faire, brands can leverage alternative formats such as running custom promotions/coupons or email marketing campaigns to reach these same retailers. In the future, Faire will likely have some kind of ad products such as featured products, which brands can leverage as well.

In the case of the software market, brands have the option of advertising on review websites such as G2 (as below) and reaching people who are in the buying journey rather than employing additional salespeople to cold call or email prospective customers. I’m not suggesting that salespeople are going away anytime soon, but on the margins, software companies might decide to spend another $200K on ads on G2.com than hiring another salesperson.

An example of a digital ad on G2.com, a software review website

Closing Thoughts

Rather than viewing the TAM of the digital ad market as just the media advertising market, it can be seen as competing with rent, trade spend, and headcount, among other things, making the TAM over 3 times as large.

The advent of new marketplaces and platforms which are vertical specific (which then layer on ads) typically grows the TAM for digital advertising since digital advertising can now compete for some share of spend which typically went into rent, headcount or other marketing type spend in that vertical.

Typically, this means that these platforms aren’t necessarily competing with other digital ad platforms for spending as much as they are competing with other categories of spend and expenses. The ad dollar spent on DoorDash might not compete with ad dollars spent on Google as much as competes with rent expenses for restaurants.

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1. Source: eMarketer

2. Source: Coresight Research via CNBC

3. Source: NatPromo

4. Source: BLS (1, 2, 3)

5. It also creates the need for different kind of marketing experts and personnel, but on an aggregate basis, there are fewer of them typically