Twitter (I can’t bring myself to call it X) has been saying that SMB, small to medium size businesses, is the next great advertising frontier for the company. This has happened on the heels of large advertisers starting to distance themselves from the brand over the last year.
I think going after SMBs for ad budgets is going to be a really tough swing for the company. I’m going to use Yelp as a comparable, given that the company explicitly focuses on SMBs as the backbone of its advertising business.
Most companies in the consumer ads space have a ~10x multiple (that’s changed somewhat, as interest rates have risen, though that’s a more recent phenomenon). However, in the case of Yelp, their market valuation tends to hover closer to 2.5B - 3B despite their revenue being $1.34B annually. So in their case, the multiple is closer to 2x annual revenue.
There are 3 reasons why this is the case for Yelp, some of which (but not all!) very much play against Twitter making a play into the SMB advertising space.
Small DAU footprint
Yelp has a small DAU footprint, and is not a daily use case. This is extremely important, because advertisers are primarily looking for reach & frequency when spending a campaign budget. The size of the DAU base is less of an issue for Twitter when it comes to ad budgets.
It's worth noting that Twitter’s DAU may be plateauing recently based on what the company has shared. There are other external reports that DAU is actually declining on Twitter since it was bought. It’s assumed then that DAU is flat to negative in recent times.
Nevertheless, if we assume that Twitter is still at 250M DAU, that gives it a level of reach & frequency that advertisers appreciate. By comparison, Yelp attracts just 80M MAU, and the company does not publish DAU as far as I can find. That’s a massive delta, as I’d guess that Yelp has a sub 10% DAU / MAU ratio. Twitter remains in good shape on this point, and Yelp is not a fair comparison here.
No play for large & medium sized advertisers
Yelp has no meaningful play for large & medium sized businesses to advertise on its platform; it’s primarily SMB driven. There’s simply not a daily use case on Yelp. It’s really more of a MAU product offering at best. To be clear, there’s absolutely nothing wrong with that. Yelp provides value to many users across the globe; they just do it with less reach, and far less frequency compared to Twitter.
Furthermore, Yelp is largely a local service. A user opens the service to discover & engage with businesses in a specific radius. That naturally lends itself to being a great play for local businesses. That’s why SMBs are the sweet spot for Yelp when it comes to advertising budgets & spend.
The problem is, these SMBs aren’t whale spenders in the same way that the key large advertisers are / were on Twitter. This will be a very tough revenue channel for Twitter to scale.
High touch, large salesforce for SMB accounts (low gross margins, high churn)
This is the crux of the issue, and why I’m doubtful that Twitter can pivot into a meaningful SMB advertiser play. The company in recent times has focused on bringing operating expenses down. Musk has publicly stated that the company has laid off more than 6,000 employees since he took over.
Going after SMBs requires a far larger salesforce. Yelp’s balance sheet indicates that Sales & Marketing is by far their largest expenditure on an annualized basis. I’d guess that the company has north of 3,000 employees working on SMB accounts. Why? Because SMBs are low gross margin, and have extraordinarily high churn rates. That means a much larger salesforce to manage acquisition & retention of advertisers.
Note Yelp's "Sales & Marketing" expenses from a recent OpEx statement
Twitter may have as few as 1300 full-time employees (admittedly this information is fairly out of date), so to staff a meaningful sales team capable of managing an SMB pool is likely to require more investment than their leadership team is comfortable spending. Ramping up operating expenditures also generates a risk that Twitter’s multiple drifts away from general consumer social plays and closer to a Yelp multiple.
My sense is that eventually, Twitter is going to have to go back to the large brand advertisers with their hat in hand: these are advertisers who spend far more, deliver recurring revenue, and drive far more revenue per sales head than the SMB play can. My suspicion is that this SMB gamble isn’t one worth taking, and that Twitter will need to find a way back to winning over the hearts & minds of large advertisers.
If we’re to believe the latest reports on Twitter’s latest ad revenue numbers from Q2, the team there will need to figure this out with urgency and a lot less brain power at the collective table.
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