Why referrals from friends are still key in the digital world

Nine out of 10 consumers say they try new products when they are recommended by their acquaintances.
Why referrals from friends are still key in the digital world
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7 min read
This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process.
Opinions expressed by Entrepreneur contributors are their own.

Last year, just as the pandemic was about to start , I took on the role of CEO of a technology platform of brand ambassadors and influencers: VoxFeed . As I had no experience in the world of digital marketing, I immediately set out to investigate this by interviewing brand managers, agencies, among other experts in order to get an idea of how the market works.

I immediately realized something strange. No one seemed able or willing to explain what the real return on their investment was in their digital marketing campaigns. I got confusing responses about engagement rate, reach, sentiment, and so on, and it all made even less sense when it came to “display” or “banner” type ads. Display is an online advertising format in which ads are displayed as banners on landing pages.

If, hypothetically, you spent 20 thousand pesos on ads of this type on Facebook or Google , what would be the real and measurable impact in terms of number of sales or number of customers acquired? I could never get a direct answer. So I started researching the available statistics, not by company, but by industry in general. The results I found and the conclusion they point to are quite shocking.

Could it be that the vast majority of money spent on digital marketing has NO measurable effect? A crazy statement, but stay with me. I'm not talking about ALL of the marketing, just the nearly $ 60 billion spent on paid display ads around the world, according to Statista.

Let's consider the following: For every 1,000 banners presented, SIX of them receive clicks (= 0.6%). 60 percent of THOSE clicks are reported as errors (big toes), so we've now reduced display ads that are intentionally clicked to 0.036 percent. You are 475.28 times more likely to survive a plane crash (or have twins or win the lottery) than clicking on a display ad. In 2020, 42.7 percent of people were using ad blockers (and the number is still increasing annually) - meaning that nearly half of spending goes to ads that no one will ever see. Without an ad blocker, the average person in the US is exposed to between four thousand and 10 thousand ads… every day! Do you think those ads that follow you everywhere work? No. Once an ad is viewed 40 times or more, the impact on sales is really negative. Surprisingly, it turns out that people don't like it when they spy on them and follow them all the time.

With these numbers it would be clear that banner ads are a waste of time and that nobody should bet on them, right? Wrong! Spending on display ads accounts for the majority of all digital spending and, according to Statista, is expected to grow more than 11 percent in 2021. How is this possible? Why do we spend so much when we receive so little in return?

I have a theory: have you heard of the story of the frog in boiling water? The temperature of the water rises so slowly that the frog does not recognize the change until it turns into frog soup. In this analogy, we are the frogs.

Display ads were new. Because there were so few of them, the click-through rates (CTR) were excellent (the first banner ad had a 44 percent click-through rate!). As word spread and more and more advertisers started using them, we collectively developed advertising blindness.

As the channel became saturated, its effectiveness slowly but steadily diminished until it ended up where it is now: very close to zero. Then came the pandemic and those who invested in real-world advertising (billboards, flyers, etc.) migrated their budgets to digital advertising as we all began to spend countless hours staring at our screens due to lockdowns.

Digital ad spend skyrocketed, ad saturation became hyper-saturation, and response (CTR) dropped by 45 percent. So we spend more on banners and displays and we get less. That fact seems undeniable. But the big question is: Why is no one willing to point to the elephant in the room? What's going on here? Is it a global conspiracy? Have we collectively lost our minds? I suspect the answer is much less glamorous and has been in front of us the entire time. Virtually none of the people who make spending decisions have a vested interest in looking too closely at ROI.

Large companies distribute the budget to the Marketing Manager and then it is filtered out to individual brand groups and brand managers. Most of the purchase of display ads is done through large marketing agencies, either directly or through programmatic platforms. No one in that chain of command would benefit from pointing out that the millions of dollars spent have virtually no impact on purchasing behavior. In fact, they would rather not know. It's not that you CANNOT calculate the impact on sales, it's just that the answer you would probably give would suggest stopping. We don't know because we don't want to know. I know what you're thinking: As a newbie in this industry, I don't know enough about how it works to make these claims.

Okay, that's fair, but if you take a step back, remove the buzzwords, and just take an honest look at the most basic data, you have to conclude that something is wrong. We spent $ 160 billion in 2019 on display ads, was the intentional click-through rate on those around 0.03 percent? I can't find any data to show that that money had any impact on buying behavior.

However, some companies are realizing this and are opting to go back to basics instead of banners: recommendations .

According to Nielsen, 92 percent of people around the world say they trust recommendations from friends and family more than other forms of advertising.

The reality is that nobody likes to be sold, but we do recommend it. That is why 9 out of 10 consumers say they try new products when they are recommended by their acquaintances against 2 out of 10 who do so when relying on digital ads.

For this reason, more and more brands are choosing to invest in referral marketing strategies and turn their satisfied customers into being an active part of their campaigns.

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