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What’s Driving Amazon’s $10 Billion Advertising Business

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Although the headlines coming out of Amazon’s Q2 earnings yesterday were all about one-day shipping, there is an extremely profitable and powerful division growing faster than Amazon’s net sales: Advertising.  

Amazon’s ad sales business increased 37% year-over-year, to $3 billion, beating expectations. Jon Reily, EVP Retail and E-Commerce at Publicis Sapient, says that this puts Amazon advertising north of $10BN in sales a year. “In addition to creating a necessity for sellers selling on Amazon's marketplace, they also have a strong tool for their own retention as they reported on the call that video ads on devices are ‘contributing to Prime retention’, Reily says. 

Reily also noted that Amazon rarely speaks about retention in Prime, so to call that out as a factor is surprising. “Much like AWS, which was created to solve their own problems and needs and then sold as a very profitable service, Amazon Advertising is looking to be very similar. Anything that keeps Prime members in the boat is a must have, and something that does that and is a profit machine contributing to >$10 billion a year is a golden goose.” 

In contrast, analysts were disappointed to see the growth of Google’s core advertising business decelerate in second quarter earnings yesterday, with ad sales growing at a more paltry 15%.  

So how has Amazon, seemingly overnight to some, created a booming advertising business off the back of a retail site?

Amazon’s advertising inventory is valuable

Most retailers historically have avoided putting advertising on their sites for fear of detracting from the main goal of the site: getting customers to buy actual products.  

But advertisers - both ‘endemic’ brands selling physical goods, and ‘non-endemic’ brands who don’t sell retail products - are eager to buy ad space on any platform where there are good potential customers. And what other advertising platform can boast 50% penetration into US households, a skew towards more affluent customers, and with an incredible treasure trove of data on these customers’ actual purchasing behavior? 

Amazon’s website is a conversion machine, Every pixel is optimized to capitalize on the user’s potential to buy, or at least otherwise engage with Amazon Prime which further promotes stickiness and lifetime value of the customer. So Amazon opening up even more valuable space on their site for advertisers is no small coincidence - the advertising business is compelled to be really profitable. 

 

An alternative to the Duopoly

Amazon offers all these things to advertisers, plus the ability to go around the current big names of the advertising world, Facebook and Google. 

 Advertising costs have crept up on these platforms in past years, as ad space has become more competitive. Earlier this year, Performance marketing agency Nanigans found that half of retail marketing executives with $50M+ in annual sales were planning to increase ad spend on Amazon - and for many, that ad budget was going to be shifted directly from Facebook and Google. 

 While Google was often the first place shoppers would search for products, people are increasingly taking their search queries straight to Amazon. Advertisers are taking note, and increasing their spend on Amazon’s Sponsored Products ad product, which places an ad for a product above the fold in search results or embedded on the page of similar products. 

Merkle’s Q2 2019 Digital Marketing Report found that Amazon ad formats outstrip Google Shopping in terms of conversion rate. Merkle says in its report that “the marketplace nature of Amazon and incentives for Prime subscribers to convert on Amazon produce a quick path to conversion for many ad clicks.” 


The promise of better data

If endemic advertisers are going to ramp up their spend anywhere, they want to do it where they can best prove a return on investment. Amazon’s differentiating factor is that ad spend can be traced from when a shopper first saw an ad impression, through when they clicked on the ad, added the product to their cart, and ultimately purchased - all on the same platform. 

Besides the end-to-end view of how an ad placement performs, Amazon also offers unique ways to target customers: with their actual shopping behavior. With the mountains of data Amazon collects, they can create customer avatars that are unique in the advertising world: shoppers who have viewed your competitors products, psychographic segments like “tech-savvy baby boomers”, and customers who have been researching products in your category over the past 30 days.

This underscores the main reason these brands are finding Amazon advertising compelling: a clear Return On Investment (ROI). With other platforms that aren’t directly connected to online checkouts, it can be difficult to know how well a campaign performed. As long as Amazon continues to dish out this small fraction of data they have on our spending habits, advertisers will continue lining up.

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