Startups Should Use Influencers—But Avoid the Pitfalls
Updated: Jul 20, 2019
Like it or not, influencers are here to stay. According to Influencer Marketing Hub’s 2019 survey, influencer marketing will become a $6.5 billion business in 2019 and half of survey respondents intend to spend at least 20% of their marketing budget on influencers. Although influencer marketing is used by both large and small businesses alike, it’s particularly appealing to small businesses and startups, which lack the marketing budgets of their more established counterparts. In fact, a 2019 Mediakix survey found the most common influencer marketing budget was $1,000 to $10,000 annually.
With limited budgets, scrappy startups and cash-constrained companies frequently try to leverage pre-existing relationships. It’s not uncommon for a small business owner to have a friend or acquaintance in the same industry who has a substantial Instagram following that consists primarily of the business’s target audience: you can throw that friend some cash or free product in exchange for a couple posts promoting your brand. The ease and informality of such transactions likely explains the rise of the “micro influencers” and “nano influencers.” Nano influencers—less than 5,000 followers—are used by 69% of companies using influencers, and Micro influencers—between 5,000 and 100,000 followers—are used by 98%.
While influencer marketing can be a relatively cheap and effective way to garner brand recognition, small businesses need to be careful. Influencer posts are a form of “native advertising,” i.e., ads that mimic and blend in with user-generated content. Because of this, they are susceptible to running afoul of deceptive advertising laws. According to the Federal Trade Commission (“FTC”), a “material connection,” i.e., a connection that might affect the credibility that consumers give the enforcement, must be “clearly and conspicuously” disclosed. In other words, it is deceptive if an influencer does not clearly indicate that the post was made in exchange for payment.
To comply with this rule, influencers are increasingly using unambiguous phrasing—like "paid for by X" or "this product was given to me by X"—or hashtags—such as #ad or #spon—to connote that they were paid for making the post. In 2016, only 1.1 million posts used such hashtags, but that number nearly tripled to 3.1 million in 2018 and is expected to increase to 4.4 million in 2019. Notwithstanding this progress, Marketing Hub’s survey found that only 11% of influencers were compliant with FTC guidelines.
As the FTC focuses more attention on combatting deceptive influencer-marketing, the dearth of disclosure could be problematic for both influencers and businesses that use influencers. The FTC has not had any problem pursuing companies who deceptively employ influencers. For example, in 2016, the FTC brought an action against Lord & Taylor, alleging the department store used online influencers to post themselves wearing the same dress, but failed to require the appropriate disclosures in the posts. More recently, in February 2019, the FTC settled an action with Creaxion Corporation, Inside Publications, LLC, and their principals, who obtained Olympic gold medalists as endorsers for their mosquito repellent, however, the athletes allegedly did not disclose that they were being paid in their social media posts.
The FTC has also begun to target influencers directly. In April 2017, the FTC sent out more than 90 warning letters, reminding influencers and marketers of their obligations when promoting products or services on social media. The FTC sent follow-up warnings in September 2017 to 21 influencers, including Lindsay Lohan and Naomi Campbell. That same year, the FTC brought its first-ever action against an influencer: the FTC alleged that two influencers/entrepreneurs made several posts, claiming to have won substantial amounts of money on CSGO Lotto, an online gambling service (technically, they were winning “skins” for the popular online video game CS:GO, which could be easily sold for money) without disclosing that they also owned the website.
And it’s not just the FTC. In 2018, the Securities and Exchange Commission settled charges against Floyd Mayweather Jr. and DJ Khaled for promoting Initial Coin Offerings on social media without disclosing that they received payments for those posts. In sum, the settlement cost Mayweather over $600,000 and Khaled over $150,000.
As the influencer industry grows, it will only draw more attention from regulators. In fact, the FTC is set to conduct a review of its rules and guidelines relating to product endorsements in 2020. Consequently, it is crucial for companies and influencers to understand and follow the rules and guidelines relating to endorsements and influencer-marketing. Companies need to be aware of the language—and disclosures— their influencers are using to promote their products.
You can protect your company by:
Learning and understanding the FTC guidance on influencer-marketing;
Vetting your influencers;
Setting clear guidelines for your influencers to follow, and monitoring for compliance; and
Consulting your lawyer.
UPDATE (6/10/19): The FTC recently demonstrated its continued propensity to regulate influencers. On June 7, 2019, the FTC announced that it sent warning letters to sellers of vaping liquids, raising issues about their use of influencer marketing, among other things.
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This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.