Gen Z and the rise of the digital influencers

Gen Z is coming. The post-millennial cohort, who range in age from 7 to 21, are starting to become their own consumers. Gen Zers have been called “digital natives” — they grew up with the iPhone (first released in 2007), and are more likely to watch YouTube than TV. Unlike prior generations who idolized TV or movie stars, Gen Zers fawn over “digital influencers” — normal teens who rose to fame through Vine, Snapchat, YouTube, or Musical.ly.

Marketers have noticed the unusual pull that digital influencers have over their followers, and many brands have jumped on the opportunity to get product endorsements. In the 1990s, Tyra Banks was the face of makeup brand CoverGirl. Now, it’s James Charles, a social media star with 1.1M Youtube subscribers.

In this piece, we hope to shed light on why influencers matter, how companies are using them, and the future of the space — which we believe will continue to expand as Gen Zers stake their claim in the global economy.

What is an influencer, and why do they matter?

Digital influencers are online “tastemakers” with large and often rabid fan bases. Many influencers rose to fame through social networks like YouTube or Instagram, and still use these platforms to publish media and interact with fans.

Defy Media’s 2016 Constant Content report found that 13 to 24-year olds watch 11.3 hours of online video a week, on average, and YouTube stars represent eight of the top 10 most known personalities to U.S. teens. 67% of Defy’s respondents said they couldn’t live without YouTube.

Since many influencers are typical tweens or teens who rose to fame on social media, they are seen as authentic, relatable, and accessible. 73% of Gen Zers “feel close” to YouTubers (compared to only 45% for TV/movie stars), and 40% say their favorite YouTuber understands them better than their real-life friends — a frightening but powerful statistic.

This sense of closeness gives influencers significant marketing power. Readers spend an average of 2 minutes and 8 seconds on influencer content, compared to only 9 seconds on traditional ad content. Gen Zers are 1.3x more likely to purchase a product recommended by an influencer than by a traditional TV or movie celebrity. In an era of increasingly effective ad-blockers, native influencer content is even more attractive to marketers.

Defy Media’s 2016 survey of Gen Zers found that teens are much more likely to follow on social media and make purchases recommended by YouTubers than traditional celebrities. This was particularly true for the 13–17 year-old age group.

Thus far, influencer marketing spend has paid off. A 2016 Nielsen study showed an 11x ROI for influencer marketing over traditional display ads, with a Tomoson survey revealing that more than half of marketers feel they acquire “better quality” customers through influencer marketing.

Already, 73% of marketers have an influencer budget, and these marketers expect to double their spend per influencer program in 2017. This year, influencer spend on Instagram alone is predicted to surpass $1B — by 2020, annual influencer marketing spend is expected to reach up to $10B.

Brands see even bigger benefits when their influencer partners cross into mainstream fame. Justin Bieber (who got his start on YouTube) is perhaps the most famous example, but others include Vine star Shawn Mendes (two albums at #1 on U.S. Billboard 200) and YouTuber Colleen Ballinger (starred in Netflix show Haters Back Off, and published a #1 NYT best-seller).

Realizing this potential, traditional talent agencies have also migrated towards the influencer space. CAA established a “Digital Talent and Packaging” division that represents YouTube stars like Jenna Marbles and Logan Paul, WME/IMG has signed more than 50 clients in the category, and UTA created a publishing platform for influencers with Simon & Schuster.

What are companies doing with influencers?

Influencer marketing started as sponsored posts or videos on social media — an influencer (let’s call her Carly) would post a photo of herself on Instagram wearing a t-shirt from Brand X, with the requisite #ad (thanks, FTC). Her followers would see a link to Brand X’s account, and Carly might even provide a discount code so they could get free shipping or 20% off.

Fashion and interior design blogger/YouTuber Aimee Song (@songofstyle on Instagram) recently partnered with APM Monaco to promote a necklace. Song’s ad was broadcast to her 4.6M followers on Instagram.

Many influencer marketing campaigns still look like this, but some brands have started to be more creative, experimenting with original video series, social media “takeovers,” curated products, and full ad campaigns. A few examples of unique campaigns that have caught our attention recently:

• Royal Caribbean worked with AwesomenessTV, a millennial media company, to create a branded video series about lovestruck teens on Royal Caribbean cruises. The show, called “Royal Crush,” just wrapped up its fifth (!) season and boasts 75M views.
• Clinique and Sephora partnered with fitness and beauty blogger Hannah Bronfman to take over each company’s Snapchat account and review Clinique products sold at Sephora.
• Birchbox worked with YouTuber Tati Westbrook to launch a new product line in their Love of Color brand, including Westbrook’s name on the packaging. The brand ranked in the top 15 makeup brands for 2015 by sales, and Birchbox has since worked with other YouTubers.
• As mentioned previously, CoverGirl chose YouTuber James Charles as the company’s first male spokesmodel. Charles’s “Lash Equality” video for CoverGirl is the third-most viewed in the brand’s history, with more than 7M hits.

We can’t recommend that you watch this in good conscience, but the teens seem to love it.

Funding and Exits

CBInsights projects that the number of influencer marketing venture deals will hit an all-time high in 2017, though total dollars invested are expected to decline from 2016 levels.

Companies in the influencer marketing space have started to attract significant venture funding across the following verticals:

• Content production companies create content featuring influencers, typically branded video series. Major players AwesomenessTV and Maker Studios each raised venture funding before being acquired. Collab and Brat Studios are early stage — both raised a seed round this year.
• Social activity scoring companies provide metrics to help marketers evaluate the reach of an influencer, which may include audience demographics and related brands. Klout, Tubular Labs, and Talkwalker have all raised $10M+ to pursue this mission.
• Marketplaces and management systems help brands find influencers and manage campaigns. IZEA is a public company, and TapInfluence and Thuzio have raised 20M+. Emerging players who have raised early funding include NeoReach, Revfluence, Surkus, and Mavrck.
• Follower interaction companies help influencers interact with fans in a scalable way. Though influencers need to appear accessible, many are overwhelmed by the sheer number of messages they receive on Facebook, Instagram, and Twitter. Shimmur and Veri are both in this space.
• Product curation and creation companies facilitate the development of products by influencers on behalf of brands. There are no huge players here, though Amazon recently announced a platform that allows approved influencers to build product recommendation pages. Quarterly, Stilnest, and Influenster are early-stage startups in this space.

Larger tech and media companies have moved into the influencer space through acquisitions. Disney purchased production company Maker Studios for $675M, while DreamWorks acquired AwesomenessTV for $117M, and Lithium picked up social scoring startup Klout for $200M. Twitter and Google also each acquired an influencer marketplace (Niche and FameBit, respectively). Most of the other exits in the space have been consolidations between smaller existing players, with undisclosed acquisition sizes.

The space saw its first public company in influencer marketing platform IZEA, which started trading in 2011 through a reverse merger. The stock has struggled — pre-Facebook’s IPO, it was trading at $64/share, but it now trades <$2/share with revenue exceeding market cap due to competition concerns.

Google and Microsoft also both recently published patents in the influencer space. Google’s patent focuses on finding “trendsetters” that help content go viral, while Microsoft wants to score experts based on their contributions.

What are the challenges?

Despite all of the buzz around influencer marketing, there are some challenges to running a successful campaign, including:

1. Finding and negotiating with influencers. With so many social media users (700M+ MAUs on Instagram alone), it can be tough for brands to figure out which influencers are the right fit (68% of marketers say they struggle with this). Negotiating terms presents another challenge, as many influencers are teens or young adults with little business experience.
2. Managing influencers. After finding the right influencer, brands need to craft the messaging and marketing collateral, get it approved, and supervise the influencer to ensure compliance. 50% of in-house managers spend 25+ hours on each influencer program, and 69% work with 10+ influencers per program — making this a daunting task.
3. Measuring ROI. Since influencer marketing is relatively new, there are unanswered questions around how to measure results — number of views? Number of comments? Purchases made with an influencer’s discount code? 78% of U.S.-based B2C companies ranked determining ROI as the biggest challenge in running an influencer marketing campaign.
4. Complying with FTC regulations. In August, the FTC sent out 90 letters to Instagrammers who needed reminders to “clearly and conspicuously” disclose endorsements. However, only 55% of marketers know what the most recent disclosure guidelines are, and only 52% of influencers say that brands always ask them to follow FTC regulations.
5. Communicating with fans. 71% of influencers say their audience comes to them because they are honest and open — being accessible is key. However, it’s impossible to sort through the thousands of social media messages they receive daily. 34% of teen “fangirls” try to get noticed by influencers every day, and 32% would pay $50+ to get noticed digitally.

A Shimmur market research survey of 1,400 13–19 year-old “fangirls” found that 83% would pay $1 or more to get noticed by an influencer in an app, while 32% would pay more than $50.

Conclusions

We believe influencer marketing is an underappreciated opportunity to reach today’s teens on the platforms where they are spending their time. In ten years, we think that most teen and young adult stars will have gotten their start online, and brands can benefit from leveraging the unique relationships these influencers have with their followers.

We’re particularly excited about companies that can tackle influencer ROI analysis and compliance for brands, as well as any networks or tools that allow influencers to more scalably interact with fans. We will also be closely following developments in the micro-influencer (10k-1M followers) space — these influencers typically have even closer relationships with their fans and can provide extremely cost-effective marketing.

If you have any thoughts on the space or are working on something exciting, please reach out.