Will Google + Facebook Swallow Your Industry’s Profits ?

Will Google + Facebook Swallow Your Industry’s Profits ?

Digital technologies have changed the way we market our goods and services. We can target specific audiences, get detailed tracking information, and optimize ads like never before.

 

One of the main ways companies generate leads and new business in this digital era is through online marketing platforms. Companies invest billions of dollars in online advertising. Last year, Google’s ad revenue alone was $95.4 billion, while Facebook’s was $40 billion. In fact, about 70% of all new marketing dollars in 2017 were given to Google and Facebook.

 

While online channels are becoming a mandatory marketing platform to succeed in today’s economy, Google and Facebook are considered powerful suppliers and according to Michael Porter, (the father of modern strategy) one of the Five Forces competing for your profits. In the Porter five forces model, supplier power is defined as supplying firms’ ability to control business prices, quality or product diversity.

 

Porter identified five undeniable forces that play a part in shaping every market and industry in the world. The forces are frequently used to measure competition intensity, attractiveness and profitability of an industry or market.

 

Threat of New Entrants 

The notion that a new competitor could enter your industry or market and drive up competition. For example, say a new business opens down the street from you. They sell the same product as you, to the same target audience. The difference is, they sell their product for half of what you do, forcing you to lower your prices to stay competitive. Your profit suffers.

 

Direct Competitor

Competitive rivalry within an industry. Your long time rival in your industry decides to drop their prices dramatically and implement a new, aggressive marketing strategy. Your company is forced to compete by either lowering prices, or spending more money on advertising. Your profit suffers.

 

Bargaining Power of Customers

The power of consumer choice. With search engines and Amazon providing seemingly endless options at the click of a button, customers have more power than ever in where they choose to buy their product or service. Say you were the only grocery store in town in 1995. Everyone shops at your store because it’s close and convenient. Fast forward to 2018, any time someone needs ice cream, they can pull out their phone and compare ice cream prices for stores all over the city. Instead of competing with the stores directly around you, you’re now competing with online retailers and stores that are further away. The consumer has the power to search around and choose where to spend their money. Instead of buying ice cream from your grocery store, they try the new parlor that opened 15 miles away. Your profit suffers.

 

Threat of Substitute Products

The threat of a new product immediately making yours irrelevant, therefore driving you to drastically change your business or forcing you out of business altogether. Think about Blockbuster and Netflix. Within a few years of starting, the movie and content subscription company, Netflix had put Blockbuster out of business. Their profit suffered, then vanished.

 

Bargaining Power of Suppliers

The more market share your suppliers have (suppliers of leads, suppliers of your materials, etc), the more power they have over your end profit. You run ads on Google, Facebook and other social channels like Instagram. You depend on those ads to bring people to your site to buy your shirts. One day, Google triples the CPC for a few of your ads. Within your set budget, fewer people click on your ads, so fewer people see and buy your product. Your profit suffers.

 

According to new data, Google and Facebook accounted for 73% of all U.S. digital advertising spend in 2017. With these two companies dominating nearly ¾ of the market, these are large companies ruling the marketing world but Google’s corporate code of conduct was changed from “Don’t be evil” to “Do the right thing” so I don’t think you’ll have to worry about Google tripling ad prices; squeezing your profits. However, YouTube (owned by Google) did raise premium ad inventory prices for this year by as much as 20%.

 

Some would consider Google and Facebook the two most powerful suppliers in your industry. Could these powerful suppliers decrease your profits in the future?

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