During Thursday’s Global Retailing Conference in New York, Restoration Hardware’s CEO, Gary Friedman, shared his company’s experience with digital advertising. The honesty and transparency of his story should cause great angst amongst any brand leader investing significant dollars in digital advertising.
Friedman claims the “vast, vast majority of online ad spending is wasted”. The personal experience he shared is simply too good to summarize, so here is his full story:
“I’ll share a little anecdote with you on this point. We had our marketing meeting, and the online marketing team pitched we should double their budget. I said, look, nobody in the company is doubling their budget, but tell me why you believe that’s the right thing to do. And they said our customer acquisition cost and our ad cost is the lowest in the company. And I said, well, tell me about the data. And they said, well, people click through the words that we buy on Google, the ad cost was lowest. And I said, how do you know that they’re clicking on the word and going to the website because of the word you bought versus they saw a store or they received a source book? They said, oh, we know.
I said, well, how many words do you buy? They said 3,200. I said, well, what are the top words? How are they ranked? Oh, we don’t have that, they say. And I was getting the look at like, oh, Gary just doesn’t get it.
I said, why don’t we cancel the meeting and come back next week when you have the data? I’m sure the Google sales representatives who are taking you to the expensive lunches and selling you the 3,200 words have that data.
They came back the next week and we sat in a meeting and there’s a little change in the faces. And they said, well, we’ve found out that 98% of our business was coming from 22 words. So, wait, we’re buying 3,200 words and 98% of the business is coming from 22 words. What are the 22 words? And they said, well, it’s the word Restoration Hardware and the 21 ways to spell it wrong, okay?
Immediately the next day, we canceled all the words, including our own name. I mean, I can’t believe how many companies are paying Google millions of dollars a year for their own name.”
Restoration Hardware found better ways to redeploy their digital media dollars, and their business has grown 14% since 2015. Their experience mirrors an eerily similar experience that P&G divulged when their CFO recently radically cut back on digital media buys. Unlike Restoration Hardware, P&G was more methodical in its testing of ad tech effectiveness, and following their months of experiments, CFO Jon Moeller declared, “We didn’t see a reduction in the growth rate. What that tells me is that that spending that we cut was largely ineffective.” In a separate meeting regarding P&G’s drastic reduction of digital media dollars, their CEO said, “We shut it down. We’re not going to follow a formula of how much you spend or share of voice. We want every dollar to add value for the consumer or add value for our stakeholders.”
How many other retailers – most of whom are scrambling to find ways to better increase customer engagement and defend against Amazon – are naively over-investing in digital advertising? In my opinion, most.
Wolf Richter, CEO of Wolf Street, author and analyst, sums up my feelings exactly. He wrote, “Retail spending (not adjusted for inflation) has grown on average 2.4% per year in the US over the past five years. Over the same period, digital advertising nearly doubled to $72.5 billion in 2016. Clearly, digital advertising – despite the lure of Facebook and the like – cannot induce consumers overall to spend more.”