Social media, the new golden goose

Companies want to skip ahead, and tap customers earlier on in the shopping process via social media audiences. Will this drive more social media M&A?

Increasing engagement

If we learned anything from TikTok’s success, it is that engagement mixed with an e-commerce outlet can be a lucrative enterprise. Leaders of the Software as a Service (SaaS) industry have long predicted this, saying that one day ‘’software companies would have an embedded media company’’. As a result, we think social media companies are about to see more attention as acquisition targets.

This is because firms are starting to realize that there are millions of monthly active users they can leverage to bolster their bottom lines. But the power of owning an audience goes beyond selling more of one’s own products. It enables one’s own brand to be used as a way to motivate user spending.

We think that today, any large enough company will attempt to leverage social media to further monetize its footprint. A company like Volkswagen, for example, could easily create an entirely virtual marketplace offering a variety of relatable companies sales channels. Owning an audience might also allow firms to react more quickly to reputational risk.

Unit economics

Companies can justify social media CAPEX through unit economics arbitrage.

When valuing a high growth company, venture capitalists will tend to measure operational health through key performance indicators (KPIs). One such KPI is the relationship between cost and return, called unit economics. Unit economics is the relationship between the customer acquisition cost (CAC), things like marketing expenses, and the customer’s lifetime value (LTV), the amount of money a customer brings in over time.

Companies offering SaaS, sports betting software, or financial services usually see high LTV, but also high CAC. That is because they work in a competitive and broad market. On the other hand, social media companies tend to see the inverse—low CAC, and low LTV. They monetize through non-recurring advertising, produce content more cheaply, but customers on average bring in small revenues. M&A thus presents opportunities for arbitrage, and better B2B penetration for both sides of the equation.

Enter “social commerce''

We refer to ‘’social commerce’’ as the fusion between social media (content and engagement) and e-commerce (payments and marketplaces). Ultimately, such a merger enables more lucrative B2B, through knowledge of customer behavior.

Square, the payment processing company, bought Tidal, a music subscription business, in order to access more than 3 million subscribers. Robinhood, the retail trading platform, acquired MarketSnacks for its 32 million subscribers, and Hubspot bought The Hustle for its 2 million users. More recently, PayPal flirted with the idea of buying Pinterest’s 450 million users.

In the case of Hubspot, buying The Hustle for an estimated $27M suggests they have a CAC per user of USD13.50 (2m users/$27m paid), but probably higher. So, Hubspot spends a lump sum to acquire an established user base (that will grow over time), it taps into 2 million subscribers, and unlocks a B2B education business segment. The Hustle should bring in an annual revenue of at least $12M, so the return on investment is straight forward.

JP Morgan Chase also recently acquired 2 million monthly users from The Infatuation, an events and food finder app. That is because JP Morgan Chase’s card business, has a high CAC and a high LTV, but it needs to grow in an increasingly competitive arena. This arena gives cardholders rewards, which pushes CACs up to $1000 per customer. To profit, JP Morgan needs to get cardholders to spend more. By acquiring The Infatuation, their logic is that the bank can now sponsor more events, onboard more cardholders, get spending up, and make up for its high CAC.

Final thoughts

Right now, there is a clear synergy to be made between social media companies and established firms because of unit economics arbitrage. What we call ‘’social commerce’’ is the result of the fusion between the two, which makes for a golden goose scenario. We have seen countless examples of large companies buying such audiences, and we would not be surprised to see more competitors joining the trend. One next step could be to research social media companies that could become targets on the premise of their audience relevance and size.

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