The Power of The Pixel

The retail economics of platform marketing.

An article was published on Wired recently about Facebook’s failure to suppress fake news. The epically long, but must-read article is titled “Inside the Two Years that Shook Facebook — And the World”. In particular, I noted the implications to corporate power, retail economics, and platform marketing in the content…

“For the first time, insiders really began to question whether they had too much power. One employee told WIRED that watching Zuckerberg, he was reminded of Lennie in Of Mice and Men, the farm-worker with no understanding of his own strength.” — Wired

Power.

A few years ago, I would post a message on my business Facebook page and hundreds of fans would talk back to me. It was overwhelming, so we spoke sparingly and carefully. We could post a new product and within a few hours, it would be sold out because so many people knew about it right away.

When the platforms began introducing algorithms to filter user content, everything began to change. At first, we felt just a little squeeze. Then, a big squeeze. Do ads to increase traffic, they said. So we did ads. Do analytics, they said. So we did analytics. Both required the installation of a pixel on my site. At first, we just had access to insightful analytics about our consumers. Gradually, the effectiveness of our spend started to drop. I began to wonder if the pixel had a budget that it wanted me to spend of every sale before it would send me new traffic. Last year, during an appointment with one platform’s advanced sales team, I was able to get the sales rep to tell me that they wanted me to spend 20% of my revenue to see real growth in incoming traffic.

I manufacture a niche product in the baby industry, an industry shaken to its core by the recent Toys “R” Us bankruptcy filings and default on vendor payments. The industry was dominated by large retailers like TRU, but the majority of our brand sales have come from small, independent retailers who lean on Google and Facebook for their customer communications. Like TRU, many of these tiny independent retailers have closed their doors due to declining sales.

Economists and analysts are looking towards Amazon as the new retail horizon. Amazon has certainly found a service-based competitive advantage, but analysts seem to have overlooked other factors driving traffic and consumers towards their various purchasing options. Retail businesses could afford to talk to an audience they could reach under the original platform rules of audience access, but retail economics don’t support the new data-driven platform marketing. Is Amazon winning the sale simply because alternatives are disappearing in feeds and search results — the very places where consumers might encounter shopping choices?

Traditional marketing interrupts reading, watching, or listening processes. Print, television, and radio are being replaced by online news, Netflix, and podcasts moving those “interruptions” to platform driven social feeds, search results, product placement, or apps.

How do platforms know what to charge retailers for platform marketing?

I’m glad you asked. Platform marketing requires the use of a hidden tracking pixel. That pixel knows everything about the customer browsing the site. It records what sites the customer browses, how long they are there, what products they look at, and even allows the platform to guess whether or not the customer might fall into certain categories. Platforms know if someone is likely to be pregnant. They also know if you just brought home a baby.

Tracking pixels also track details about my company. My revenues and specific product sales are recorded at the micro-level. Pixels know what products sold to which customer and what that customer spent. On a macro-level, it has detailed information about which areas of the country are shopping and the socio-economic trends of the larger consumer base for a business and a business segment.

What about the retail economics?

Platforms are leveraging the valuable data stored in pixels. According to Business Insider, Facebook generated $27B in ad revenue in 2016 compared to Google’s $80B. In 2017, Facebook generated $39.9B in ad revenue compared to Google’s $95.4B.

The advertising industry generated $103.7 billion in revenue in 2016. In 2017, the estimated ad spend was $217.8 billion. In other words, the cost of reaching consumers was expected to more than double in 2017 and $135.5 billion, a staggering 62%, was spent with Facebook and Google.

Was ad revenue available to be captured out of retail margins? Retail businesses are closing in record numbers. Apparently not.

Pixel data creates economic leverage for platforms.

The pixel enables platforms to leverage a percentage of a business’ balance sheets. Because platforms are now the largest source of incoming traffic for many websites, they can now also “turn off” companies, industries, or countries by simply shutting down incoming traffic.

Scale that power out over every single company who is doing online marketing using platforms like Facebook or Google, and now you have a few public companies able to pull levers of economic growth for all of those companies — at will.

What are platforms doing with their economic leverage?

Let’s look to the media for a pattern. The Wired article goes on to discuss the conflict between Facebook and large media organizations. Media only generates about 5% of Facebook’s traffic, yet Facebook drives most of their traffic.

And journalists know that the man who owns the farm has the leverage. If Facebook wanted to, it could quietly turn any number of dials that would harm a publisher — by manipulating its traffic, its ad network, or its readers. — Wired

Over the last several years, Facebook has been making it much more difficult (and expensive) for posts to be seen in user feeds. Recently, Zuckerberg announced that Facebook would be downgrading posts shared by businesses, celebrities, and publishers, effectively shutting off the flow of traffic from Facebook to those sites.

Smaller businesses and influencers were popping up at record rates a few years ago, successful largely based on incoming traffic through reachable fans on social media platforms. The impact of those changes has resulted in lower traffic to sites unless they spend more money to make sure posts are seen in feeds.

What are the implications for retailers?

Advertising used to be negotiable because real revenue was, for small businesses, a private affair. Today, platforms know everything. They hold all the cards. Businesses have lost control of rising marketing costs as publicly owned platforms seek to show growth and maximize profitability. Labor costs have increased due to regulatory requirements. Manufactured product costs have not dropped and downward pricing pressure has increased on brands through direct to consumer competition from Chinese firms producing knock-off and counterfeit goods.

Could we soon face a reality where a few large retail platforms like Target, Walmart, and Amazon are buying counterfeited products from Chinese factories (based on stolen domestic intellectual property) while brand owners and small retailers have been effectively eliminated from the supply chain?

If platforms like Facebook and Google didn’t know that feeds and search results could be manipulated to influence the outcome of an election, are they also unaware that they have a heavy influence on business economies too?

Archimedes once said, “Give me a lever long enough and a fulcrum strong enough, and I will move the earth.”

Ladies and gentleman, I give you the pixel, an invisible, tiny crowbar fueling the retail crisis of 2018. It’s not all Amazon’s fault.


For Discussion: What is the implication of megafirms having the power to create or destroy business?

Jenn is the Founder and CEO of Cotton Babies. She holds an Executive MBA from Washington University. She was awarded Ernst & Young’s Entrepreneur of the Year award in the Emerging Category for the Central Midwest Region in 2011. Among many other awards, she recently received a 2017 YWCA Leader of Distinction Award for Entrepreneurship. Jenn holds many patents on various inventions in a number of different countries and is listed as one of 50 Missourians You Should Know. She is particularly fascinated by languages, chickens, and children (she has four) when she’s not reading economics journals.

Do you have thoughts to add?

One thought on “The Power of The Pixel

  1. Very interesting! I typed in “Cloth Diapers” in my Safari browser and Cotton Babies did not show up as a result! Wow.