Industry
The leaky funnel: Why D2C brands must rethink digital ad spend and why agencies need to wake up and smell the coffee
Summary
- Operating across social platforms, marketplaces and websites often results in fragmented customer experiences.
Global digital ad spending is projected to surpass $700 billion by 2025, with direct-to-consumer (D2C) brands leading the charge. Many allocate over 80% of their budgets to digital channels, focusing heavily on bottom-funnel performance tactics that promise quick returns. However, this approach has created a “leaky funnel" dilemma: without long-term brand-building strategies, these investments often fail to drive sustainable growth. Once ad spend stops, so does revenue.
The bottom-funnel trap: Immediate gains, long-term risks
D2C brands’ reliance on performance marketing leads to short-term wins but creates significant growth challenges over time. Consider these key pitfalls:
Early wins, growth plateau: Performance marketing can deliver a 3-5x return on advertising spend (ROAS) in the early stages, but returns diminish as brands scale. Nielsen reports that 56% of D2C brands see declining ad returns once they surpass $5 million in revenue. Without brand equity, performance marketing alone can’t sustain growth.
Brand fragility: Heavy dependence on paid acquisition leaves brands vulnerable. Harvard Business Review highlights that consumers are 70% more likely to return to brands they recognize and trust. Yet many D2C brands lack a strong brand identity, making them fragile in the face of rising acquisition costs or budget cuts.
Inconsistent customer experience: Operating across social platforms, marketplaces and websites often results in fragmented customer experiences. Bain & Co. reports that a consistent brand experience boosts retention by 30%, a missed opportunity for many D2C brands.
The pitfalls of transaction-driven strategies
D2C brands’ focus on immediate conversions through Google and Meta limits long-term potential. This transaction-first mindset introduces challenges:
Customer friction and data blind spots: Few D2C brands build a robust data culture to identify friction points across the customer journey. Brands leveraging data-driven strategies see a 10-20% boost in retention, but most rely on platform metrics instead of deeper insights like customer lifetime value.
Over-reliance on Google and Meta: Many estimates suggest 70% of global digital ad spend flowing to these two platforms. Larger brands often secure joint business plans (JBPs) for preferred inventory and insights, leaving smaller D2C players to compete with higher costs and fewer resources. This narrow focus stifles diversification and innovation.
Why the agencies guiding the D2C players need to evolve
Agencies have the potential to steer brands toward sustainable growth but often remain stuck in short-term tactics. Here’s why:
Lack of innovation: Agencies favour high-volume, tried-and-tested strategies over exploring emerging platforms. McKinsey data shows diversified digital investments can boost brand engagement by 25%. There are many options to explore today and build first-mover advantage. However these continue to remain a missed opportunity.
Talent exodus: As the D2C marketers realize the leaky-funnel syndrome and lack of strategic support from their agencies, they will bring digital marketing in-house, poaching talent from agencies. Brands seek experts who can customize data-driven strategies, offering talent greater training and more depth in their professional experience, leaving agencies struggling with innovation gaps and client attrition. Deloitte reports a 35% increase in D2C brands bringing their digital advertising in-house. This trend is likely to continue.
The path forward: People, product, processes and profits
To remain relevant, agencies must pivot to a balanced, client-centric approach that combines short-term performance with long-term brand-building. Here’s how:
People: Foster continuous learning to retain top talent skilled in emerging and traditional platforms. Agencies that prioritize multi-channel expertise can address both immediate performance needs and brand-building strategies.
Product: Shift from platform-centric solutions to integrated campaigns. Multi-channel strategies deliver 20% higher return on investments (ROI) compared to single-channel efforts, according to McKinsey. Agencies should guide clients in choosing the right tools and technologies to optimize their marketing stack. Studies indicate marketing heads grappling with 30 odd Mar-Tech tools on an average.
Processes: Develop data-driven frameworks for funnel attribution and customer journey mapping. Clear metrics for top-, mid-, and bottom-funnel performance enable sustainable growth by balancing short-term conversions with long-term loyalty.
Profits: A sustainable client portfolio ensures consistent revenue for agencies. Evolving from vendors to strategic partners secures their place in clients’ growth journeys.
The stakes are high
Brands that ignore long-term brand-building risk over-reliance on platforms with rising acquisition costs and limited differentiation. Agencies stand at a crossroads. By guiding clients toward a holistic digital strategy, they can drive lasting growth and secure their role in an increasingly competitive landscape.
The key takeaway? Performance marketing may open the funnel, but only a balanced strategy can keep it from leaking. It’s time for D2C brands and their agencies to rethink their game.
Yesudas S. Pillai is founder and chief executive officer of Y&A Transformation and strategic adviser at Channel Factory.
