Commentary

The Amazon Ad Trick

Amazon is the king of retail, and every now and then it finds new ways to tax its partners. The company’s Sponsored Product ads, in which brands can bid to include their products within on-site search listings, have long been one of its most popular and effective tools. The reason is obvious: opening listings up to bids theoretically allows one brand to get the best ranking and pull revenue away from competitors.

But Amazon’s goal isn’t to have a single brand bid for rankings – it hopes that all brands will compete for premium real estate, in a way that ultimately benefits Amazon above all others. Growing popularity has led to increased competition, forcing all partners to spend on the ad units without any noticeable change to the search rankings. The result is that Sponsored Product ads now feel more like a tax than a revenue creator. It’s unlikely that brands can avoid Amazon’s ad trick, but they can prepare so that they still create value for their business. 

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Amazon touts Sponsored Products as a tool that puts products in front of “shoppers who are ready to buy.” The model operates on a pay-per-click basis, inserting sponsored listings at the top or within Amazon search results and taking consumers directly to a product page when they click. The ads account for the majority of ads purchased on Amazon and in recent months have received more noticeable real estate within search results.

This is a shrewd move by Amazon. The retail giant has plenty of options when it comes to extracting more money from brand partners. One alternative would have been to raise partner fees, but that risks losing brands that already operate on thin margins and would therefore be priced out. By strengthening Sponsored Product real estate, Amazon entices the brands that are already profiting to invest back into a closed ecosystem. It’s akin to a profit tax, forcing those that are already succeeding to spend more to maintain their success.

Unfortunately, there’s no way for brands to avoid this tax in the long run. Still, there are a few different ways to respond. The first path is to embrace the biddable listings full on, becoming an early adopter and acting faster than the competition. This helps brands build a lead and learn new solutions when they come along. Of course, if brands stop there, the competition will eventually catch up.

Measurement is the second piece needed to play Amazon’s game, and it’s the key to unlocking any value. If brands can understand the kind of incremental value that Sponsored Products listings bring, then they can allocate their budget for the optimal Amazon ad-buying strategy. If brands can bridge the gap and compare their Amazon spend alongside their traditional search, shopping and display ad performance, they’ll have a holistic understanding of what is driving their sales.

The problem is that Amazon’s internal stats are useless. They show highly inflated numbers, which have nothing to do with the actual impact that the paid listing is having on consumer behavior and purchase habits. For example, Sponsored Product listings even appear in the listings for brand searches, meaning that the ad is purchased in an instance in which the consumer was very likely to buy the brand anyway. That’s not an example of Amazon giving brands an opportunity to make more value: it’s a chance to earn more revenue at the brand’s expense. 

As long as Amazon dominates the online retail world, partner brands will have no choice but to go along with the changes in the ecosystem. Rather than simply paying the fee to continue selling on Amazon’s turf, brands need to push to get a grasp on measurement and incremental lift. At their core, Amazon’s tools are designed to be helpful, and not merely a tax. The brands that can measure their success within Amazon will be able to allocate and optimize their budget toward a much higher-value advertising future.

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