What you need to know:

• Major study suggests Apple’s 2021 privacy changes led to significant declines in revenue for ecom firms heavily reliant on Meta for acquisition.
• Impacts worst for smaller D2C retailers, with a 39.4 per cent reduction in revenue directly linked to inability to acquire new customers, per the study.
• Authors suggest privacy overhauls will have similar impacts.
• “The magnitude of the losses threatens the viability of firms, such as direct-to-consumer firms, that rely on targeted social media advertising as their primary source of customer acquisition,” the study concludes.
• Marketing advisor and reformed ‘growth hacker’ John James sees marketers still doubling down on channels like Meta despite declining yields and increase costs.
• "We are now dealing with marketing teams that have grown up exclusively using these channels. It is all they know. They don’t know what else to do."
• James agrees that small businesses will feel brunt of privacy impacts if they cannot adapt to new reality and adopt new approaches.
• Either way, he thinks the platform majors will end up benefitting from privacy reforms.

Privacy reforms are due before parliament any day. For an idea of impacts, Apple’s ATT change – just one privacy change versus the slew incoming locally – serves as a taster for what’s to come, with ecom firms bracing for impact.

A new study spanning thousands of ecommerce firms and billions in spend, suggests that click through rates for third party conversions – i.e. sales on the advertisers’ own site or app – plummeted 37 per cent, acquisition costs soared and revenues for DTC firms more heavily dependent on Meta plunged 39.4 per cent in the 18 months following Apple’s iOS 14 update in May 2021.

The drop off came fast – and stayed low over that period, with the paper’s authors suggesting the changes undermine the viability of DTC business models that rely heavily on targeted advertising.

While Australia’s lawmakers must weigh up the reduction in consumer harms from the wholesale data mining, tracking and trading that underpins digital advertising, the paper suggests the stock ‘think of the small businesses’ response to tightening privacy laws pushed by Google, Meta and local trade associations has some merit. (Equally, small businesses also existed before hyper-targeted media based on personal data trading.)

The study

The paper studied two years’ worth of ad and sales data from September 2020 to October 2022 across retailers in fashion, consumer electronics, beauty and cosmetics, and general e-commerce retail. While that period covers Covid's worst impacts and an ecom boom followed by a return to the norm, the study authors say the impacts on conversion and sales came quickly – observable within five weeks of Apple's privacy update. 

Per the study:

“The large and negative impact on revenues indicates that opt-in privacy regulation has a significant economic cost for firms that rely on targeted advertising for revenue generation, and especially for smaller firms. In particular, the magnitude of the revenue reductions suggests that privacy regulation can threaten the viability of business models, such as those of DTC firms, relying on targeted advertising.”

Likewise, there are implications for broader economic growth – because, per the paper, the costs of launching a start-up DTC business is higher since Apple doubled down on privacy and hobbled its rivals. The overhaul of the Privacy Act goes much further, deeper and will apply across the entire market.

“Our primary findings are that ATT significantly degraded the performance of Meta advertising and, subsequently, that more Meta-dependent advertisers had a 39.4 per cent reduction in revenue that was primarily felt by small businesses and was driven by a reduction in orders from new customers. As such, while firms reallocated some of their advertising away from Meta towards the Google ecosystem to mitigate the impact of the decline in Meta advertising effectiveness, they still suffered a substantial decline in their revenues,” the study concludes.

“Our estimates suggest large economic costs of opt-in privacy regulation. While there are positive consumer welfare gains from the added privacy protections, the magnitude of the losses threatens the viability of firms, such as direct-to-consumer firms, that rely on targeted social media advertising as their primary source of customer acquisition. As such, there could be a countervailing force on consumer welfare if the revenue losses are large enough to induce substantial exit and deter entry of these firms into product markets.”

ATT 101

ATT, or app tracking transparency, went live with Apple’s iOS 14.5 update on 25 April 2021.

It prompted all app providers to give all users a simple choice: Allow them to track their behaviour and share it with third parties – or don’t.

The vast majority of people have chosen not to be tracked – which provides a strong indication that consumer advocates are right to question the industry line that consumers want personalisation. Within a couple of weeks of the rollout, opt-in rates in Australia and globally struggled to hit double digits. The new study suggests opt-out rates globally are 80-85 per cent.

Before ATT you could track conversions on iOS devices, after ATT you couldn’t – advertisers could see if someone clicked on their ad, but not what happened afterwards. That’s because without consent to track for both publisher and brand, companies like Meta no longer had access to an identifier – ID for Advertisers, or IDFA, which enables targeting and measurement – that previously would have been passed back to it from online stores following a sale, closing the loop.

ATT hobbled that attribution system, leaving platforms scrambling for new probabilistic conversion models and digital marketers working out how to plug the hole blown into their ability to optimise. Meanwhile, advertisers may find that the vast majority of their targeted programmatic display impressions are now being served to Chrome browsers, effectively missing half the market.

The broader effects are still playing out. Marketing adviser John James, who spent a decade in Silicon Valley ‘growth hacking’ for start-ups, has long warned that playbook – social-skewed performance advertising to power cheap and rapid customer acquisition – is a busted flush, with costs increasing and yields plummeting.

He suggests digital marketers know that they are no longer getting the returns, “but before they abandon it, they double down on what's not working ironically, spending more to compensate. Everyone is just spending more to try and get the same result.”

That in turn drives price inflation, creating a negative spiral – with both Alphabet and Meta posting bumper revenues as a result.

He thinks the same pattern will follow post-Privacy Act overhaul.

“They [the platforms] win either way. Everybody has to spend more, so it is actually in their interests for privacy to go ahead.”

Shift or bust

While some suggest privacy reforms will divert marketing spend towards other channels, James is not convinced.

“The switching barriers are so high.” He cites an IT services company client, “an SME with a few million in revs … all they have ever known is a dashboard, they have a digital marketing agency, clicks coming through, converting the form … that has been their whole world for years. They are paying $58 a click [on Google] and $3,000 for a shitty lead. I suggested they physically send something really nice for $58 to a list of prospects and would get a better hit rate. But they went back to what they are doing. It’s a psychological thing. People feel safe doing what they’ve always done.”

He also thinks one of the findings of Mi3’s FY25 Marketing & Customer Benchmarks report – that 43 per cent of marketers are planning to increase performance marketing spend this year – is unsurprising. (The Benchmarks report also suggested a shift to customer lifetime value over acquisition, which may be related to loss of signal and increasing acquisition costs.)

“That is what people do when things aren’t working. They take [budget] away from things they think aren’t working and put it into things they think are working. But they don’t actually know whether it is working or not, or how much," he suggested.

James thinks it is no coincidence that market mix modelling is enjoying a renaissance as brands try to get a better handle on which investments are driving sales. But he said the biggest barrier to new-breed MMM platforms like Mutinex and US-based Recast is resistance to change.

“We are now dealing with marketing teams that have grown up exclusively using these channels. It is all they know. They don’t know what else to do. They're so indoctrinated by that system and everything else that supports it," said James. "That is such a big mindset shift and you can’t change it overnight.”

Privacy reform may yet force that cultural shift – or leave brands even paying more for even less.