In direct-to-consumer digital health, advertising is a pricey equation

Broader economic challenges and increased advertising costs are creating challenges for digital health companies starving for growth and profitability.  

Experts say as economic conditions worsen, companies appealing directly to customers will need to get creative in how they offer value.

"The complexity with consumer-focused models is that they are front line—they maybe see that [economic] reaction first,” said Bill Geary, co-founder and partner at Flare Capital, a venture capital firm investing in early-stage and emerging healthcare and technology companies. “The focus on customer acquisition cost, the long-term value of customer—those are super hard metrics to get right.”

Geary said balancing profitability with growth can be difficult—especially for early-stage companies. Many are reducing advertising spend as a result.

While Headspace Health isn’t a startup, it is reducing advertising spend on the path to profitability, said Russell Glass, CEO of Headspace Health, a digital mental health subscription company.

“Going into this year, we reduced marketing spending by probably about 60% or so,” Glass said. “The goal of that wasn't necessarily because we didn't think there was ROI or a reason to advertise. But we did feel like we wanted to have a profitable consumer business, we felt like we wanted to make sure that business was scaling smartly because it was getting crazy in terms of the competitive nature of those ads.”

On its second quarter earnings call, Teladoc CEO Jason Gorevic said that increased advertising costs would slow their total spending in the fourth quarter of this year. Teladoc has both direct-to-consumer and enterprise service lines.  

“We’re not shutting off advertising completely,” Gorevic said. “But it is a reduction because of greater expense per advertising impression. Therefore, we want to make sure we’re making good economic decisions.”

According to experts, other companies are taking similar actions for two macroeconomic reasons. First, inflation is pushing the cost of each impression higher.

The second is more nuanced. A change in Apple’s privacy settings last year has stymied the effectiveness of certain ads, particularly on Facebook and Instagram. While consumers benefit from data privacy, many companies are finding they need to spend more to reach the same number of customers on these social media networks.

“Word on the street among direct-to-consumer marketers is that the Apple changes in the name of privacy have damaged the effectiveness of Meta’s ads from an ROI point of view, especially for smaller businesses,” said Jeffrey Glueck, CEO and Founder of Salvo Health, a virtual clinic that sells directly to people with chronic gastrointestinal conditions, in an email. “Meta ads have been among our most cost-effective channels so far since Salvo’s launch.”

Salvo Health, which earlier this month received $10.5 million in seed funding, just launched publicly. Its growth strategy follows a similar trend where companies target consumers first and then bring that pitch to enterprise customers. Offering value to multiple customer bases can be the foundation to successful businesses, experts said.

While Glueck said subscription-based businesses could feel a pinch if the economy worsens, partnerships can offer some cover.

“We need to think more creatively as direct-to-consumer companies about how we can add value at more affordable price points without sacrificing quality,” Glueck said. “Narrow point-solution type products may need to expand their incentives and benefits, so consumers can justify their purchase decisions.”

Instead of saturating potential customers with advertising, Glueck and other companies, like Dr. B, a pharmacy startup, headed by former Zocdoc CEO Cyrus Massoumi, are focused on partnerships and  word-of-mouth advertising.

“There are a lot of consumer companies or digital health companies that have done things like bought Super Bowl ads or subway ads,” Massoumi said. “I'm of the belief that word will spread and people will talk about the service because of how efficient, how convenient, how safe it is. They will tell their friends about it, so I won't need to buy those same Super Bowl ads.”

More established companies have insulation   

Experts say established direct-to-consumer companies can better weather a potential storm. Despite reducing its overall marketing spend by around 60%, Headspace Health has seen 100% growth in its health plan service line.

“We will continue to market and ensure that consumers see that this is an option, but we're going to do it smartly,” Glass said.

While there is insulation to healthcare spending, experts say it is impossible to ignore broader economic conditions

“Certainly, you’d hate to see basic health needs of a consumer be impacted,” Geary said. “At the same time, those are decisions that consumers make, they choose not to fill prescriptions, they start titrating their own meds because of costs.”

A study last month from the Kaiser Family Foundation found around half of U.S. adults said they had difficulty affording healthcare costs, with about 40% saying they have delayed or gone without medical care in the last year due to cost. The same study found about a quarter of adults reported they or a family member have not filled a prescription, cut pills in half or skipped doses of medication due to cost.

Many digital health services are not viewed as vital as medication. For companies offering those services, they must find value. According to Deepak Chaudhry, a senior managing director in the digital health practice at FTI Consulting, a global consultancy, companies will need to be increasingly creative in marketing.

“Digital health companies will need to know their clients a little bit more intimately and understand the pain point that they're trying to solve,” Chaudhry said. “Because ultimately, you want to make that product sellable, and in order to sell it you’ve got to demonstrate return on investment.”