An interesting data nugget was revealed during Amazon’s recent Q4 2016 earnings call when Amazon finally unveiled some of the underlying financials related to their nascent digital advertising business. Only the most seasoned of Amazon watchers might have noticed, but if you look closer and especially under the rather innocuous “other revenues” header, you no doubt saw some intriguing information.
In this article, we’ll take a closer look at the specific platforms and ad format(s) that are driving that “other revenue.” Please note that specifically for our purposes as a digital agency focused 100% on Amazon, we’ll be focusing mainly on the Amazon Marketing Services (AMS) platform.
It’s also worth noting early on in this piece that Amazon’s display advertising platforms are still very much in their relative infancy. While we’ve eagerly taken full advantage of the platforms over the past few years, we expect many new and improved features (after all, this is Amazon) to be revealed.
We were particularly excited about the prospects of dramatically “more robust” reporting since benchmarking, and comparisons (against previous campaigns) can be a challenge. Finally, as with all things Amazon, we expect to see a massive migration of users. In this case, we predict traditional marketers and agencies will fuel competition and bid prices for valuable and relevant keywords as more and more old-school and emerging brands seek to leverage both Amazon Marketing Services and Sponsored Products.
Experienced vendors and sellers are no doubt aware that advertising-on-Amazon options have been available in one form or another, for several years now. The best-known digital ad platforms include Amazon Marketing Services – available to First Party Direct vendors on Amazon Vendor Central and Sponsored Products – for Third Party sellers on Amazon Seller Central. Amazon Marketing Services and Sponsored Products are the focus of this article.
But we’d be remiss if we also failed to mention the Amazon Media Group (AMG) and the Amazon Advertising Platform -where advertisers can create placement for the wake-up screen on Kindles, Fires and Android devices, as well as push their ad impressions onto the Amazon ad network targeting Amazon’s owned-and-operated sites and apps. That network includes, of course, the Amazon.com mothership and IMDb (Internet Movie Database). It also includes a host of publisher sites, Amazon affiliate and associate sites, games and apps, and more which are accessed through the some of the largest online ad exchanges.
But again, for most Amazon fanboys and girls, it wasn’t until the most recent fourth quarter of the 2016 earnings call that Amazon began to focus more attention on or even speak to the powerful backend engine driving that “other” revenue.
But the question that remains is: What is that “other revenue”?
Based on several media reports, Amazon’s “other revenue,” which is assumed to consist of a combination of all the elements outlined in the previous paragraph, had a very nice 2016. In fact, that “other” revenue delivered a year-over-year growth rate of roughly 60% and accounted for approximately $1.3 billion in revenue for the year. Not too shabby. While savvy investors (and especially Amazon shareholders) are salivating over these numbers, one need to only look at the disruptive track record of Amazon on a macro, two-decade timeline, to put this latest news into better (and/or a more “disruption-is-coming”) context.
As per digital ad industry experts, such as eMarketer, online and/or digital ad spending within the United States was about a $72 billion business in 2016. And that market is only expected to keep on growing – to the tune of at least $10 billion per year — over the next several years. The digital advertising landscape is dominated – at least currently – by Silicon Valley heavyweights Facebook and Google. But, as they say in the hip-hop game, “don’t sleep” on Amazon.
If Amazon is anything, it’s an always morphing and evolving force that should never be underestimated. Amazon enjoys an incredibly unique (not to mention enviable) position in the world of online advertising in that they already maintain long-standing business relationships with the large brands most likely to be active/spending players in the digital ad space. In addition – because Amazon has a rich 20-plus years diverse set of customer behavior data – they know at very granular level what appeals to their customers and why.
In fact, did you know that depending on how long you’ve been an Amazon customer, that you can quickly go back a decade or two to your very first order? In my case, that’s nearly 20 years of Amazon shopping cart curation. You can see the actual Amazon products that earned their way onto your shopping list – and again, at any given point in time.
For example, I took a quick look recently to see my first wave of Amazon orders from way back in 1998. As a long-time and self-professed bibliophile, I apparently felt the “consumer need” for the John Irving “A Son the Circus” novel the day it was released; as well as the jazz stylings of that year’s Medeski Martin and Wood compact disc, and a book on parenting called: “Positive Discipline: The First Three Years – Laying the Foundation for Raising a Capable, Confident Child.” Three kids later (and all of them currently in their delightful teen years) I’m thinking that I may want to re-read a few chapters of that “Positive Discipline” to see where it all went wrong. Just kidding. Mostly.
But again, using the personal examples above, imagine taking that type of product granularity and then extrapolating it across hundreds of millions of Amazon shoppers since the literal “day one’” of Amazon, and you begin to grasp the incredible opportunity. It’s all but inevitable now. Amazon will focus their considerable brainpower on the digital advertising game, and it’s flat-out obvious that not only can this digital ad business be large and profitable, but it is also likely to be massive and hugely profitable.
As noted earlier in the intro, Amazon Vendors and Sellers have had access to an evolving “Google-like” set of advertising tools and keyword-bidding services for several years now. During that time, ease of use and general functionality have steadily increased as have the advertiser’s costs (chalk that up to good old supply and demand).
From the beginning, unsurprisingly, the strategic purpose of those tools has revolved around to making it easy for Amazon merchants, vendors, sellers, brands, manufacturers, and even your brother-in-law selling used textbooks from his garage, to easily surface their own Amazon listings in the search results for the Amazon marketplace.
The basics of Amazon Marketing Services
Amazon has a vast portfolio of advertising tools. In this piece, we’re taking a closer look at the following three types or general categories of Amazon’s digital advertising platform:
Sponsored Product Ads – These are essentially keyword targeted cost-per-click (CPC) ads. These ads appear on Amazon in several places but most often on the right side or the bottom of the Amazon search results page. Advertisers have the option to select keywords manually (manual targeting) and/or to allow Amazon to do it for them (automatic targeting). Automatic targeting enables the advertiser to not only create campaigns in minutes but also to leverage Amazon algorithms to automatically collect and target highly relevant keywords for the products being advertised.
Headline Search Ads – This “flavor” of Amazon advertising helps drive sales as well as brand awareness with keyword-targeted ads that, like a headline, appear above Amazon search results. This tactic or ad format enables the advertiser to promote three ASINs (Amazon Standard Identification Numbers) at once while driving customer traffic to a custom landing page (commonly known as a brand page) on Amazon. In our opinion, Amazon brand pages are notoriously underrated and underleveraged too (perhaps a topic for a future article).
Product Display Ads – These ads will appear across Amazon.com desktop and mobile placements on Amazon detail pages, below search results, customer review pages, and elsewhere including those ubiquitous merchandising emails Amazon sends. These emails include the abandoned shopping cart, item view follow-up, and all related recommendations that are driven off of a customer’s browsing history and behavior.
Vendors using this ad type can choose to target potential customers using either “contextual” or product-based criteria (as in similar or complementary products as the item being advertised) or via “behavioral” targeting by interest (such as we saw you just bought a book about Golden Retrievers, so we’ll put a dog food or pet toy ad placement in front of you next).
Why you should jump head first Into Amazon Marketing Services
For any existing Amazon third-party sellers or first-party direct vendors that have not already jumped head first into the Amazon digital ad game, we here at Zanoma, with all due respect, would like to reach out and grab you by the lapels and say “C’mon man! What gives?” Bob Dylan probably said it best when he opined that “he who is not busy being born, is busy dying.”
And if we’ve learned anything over the years of navigating the piranha-infested waters of the Amazon, it’s the fact that effective sellers and top-of-the-podium vendors are never quiet, never docile, and never coasting along in neutral.
Our team not only uses all the Amazon-certified (or Amazon-blessed) tools available as part of our strategic and ongoing “keyword harvesting” mentality, but we also use a mash-up of our combined experiences and the nuggets of information we’ve pulled from historical data related to ad campaigns to push and expand thinking for the next campaign, or better yet, the evolution of an existing campaign.
At Zanoma, we explore every aspect of advertising data, determine improvements and then work to leverage and/or eliminate any gaps. We are fortunate to have an incredibly savvy software development team which has produced a unique and ever-increasing arsenal of internal tools, alerts and monitors, and other proprietary technologies to ensure our client partners are best positioned for success with Amazon Marketing Services and other equally crucial elements of the Amazon business equation.
We use these software tools not only for relevant and precise keyword mining and campaign refinement but also to help identify and define advertising reach and efficiency beyond simple “ACoS” (Advertising Cost of Sales).
Tips on optimizing your ACoS
ACoS is the generally accepted and arguably most important metric used to measure the conversion performance of Amazon digital ad campaigns. The conversion rate is the percentage of customers who see the ad (also measured as impressions) and take the desired action. In the case of a digital display ad, the obvious goal is to convert the customer to buy the item after seeing the ad and its compelling, persuasive content and fair price. While conversion is job number one, ad impressions are also valuable and worth noting.
Let’s break these concepts down even more. First of all, ACoS means the ratio of the vendor’s ad spend to sales and is calculated like this: ACoS = ad spend divided by sales attributed to the ad.
Perhaps the simplest way to put ACoS into context is to fire up Excel and run a unit economics model to ensure you understand the real profit margin of the product you’re selling. For this example, let’s agree that profit can be calculated (roughly) by taking your product’s retail price minus your costs on the same, as well as the related Amazon fees (for the sake of this example, let’s say the Amazon selling platform is 3P – which is predicated on retail) and arriving at a percentage.
In simpler terms, let’s say that your flashy new widget has a retail price of $100, while your associated costs to produce said widget are $30, and the related Amazon selling fees are $20. This means each time that item is sold on Amazon, Amazon gets $20 and you get paid $80. After you subtract your associated production costs of $30 – we’ve arrived at a net profit of $50 or 66%.
While that is an admittedly high (or generous) profit margin, it does help to illustrate the unit economics and set the table for ACoS. Now imagine you spent $10 on a headline search ad which resulted in a single sale of that same $100 widget – factoring in $10 ad costs, drops your net profit from $50 to $40 per unit and delivers an ACoS of 10%. You’ll always want your ACoS percentage to be lower, and ideally much lower, than your profit margin.
Zanoma’s special and secret sauce (or just a hint)
At Zanoma, we encourage clients to plan for advertising on the Amazon platform and to factor in a healthy percentage of marketing costs for ad spends on Amazon. We also work closely with our clients to maintain and monitor all data related to the ad spend, as well as the relative profits from a given campaign, while constantly factoring in what the acceptable or “danger” thresholds are at all given times.
As Bob Dylan said, it’s crucial to stay “busy being born,” which means to constantly consider the best keywords and targeting tactics to move the needle. Since Zanoma is an agency with vast experience managing client brands across a wide range of Amazon product categories, we know what constitutes a real win and a real slam dunk (in other words, we don’t believe in 8-foot “dunk hoops” for business measurements).
The AMS Vendor 1P platform, as well as the complementary Seller Central advertising tools, are not easy to master, but they can be leveraged. The core of our business is built around client partners who are willing to consider and commit to a digital ad spending investment on Amazon.
The basic premise of this article began with the “other” revenue glimpse into Amazon’s most recent earnings call and the fear and/or glee it’s ushered into the investment community (and/or to Facebook and Google). We then followed up with a nuts-and-bolts overview of how each unique element of Amazon’s ad platform is designed and defined and we ended with an economics 101 overview of how a vendor or seller can consider the relative financial merits of using the platform.
In other words, we’ve covered a LOT of ground in this article! So, give yourself a pat on the back, put on your headphones and listen to that Bob Dylan song we mentioned
If you were more focused on ultimate Frisbee, existentialism and/or early-American literature back when you were an undergrad (instead of business and/or economics): we get it, and we understand. But fear not. We are happy to help! Our team has vast experience in all flavors of Amazon’s digital advertising buffet, and we are always comfortable working with clients or potential clients, to consider and review all of the fundamentals of your business.
Thanks for your time reading this article, we hope you found it informative. If you have specific questions or would like to see a deep-dive on an Amazon-related topic for a future blog, please contact us today.
* Addendum – Amazon Media Group (AMG) is a juggernaut unto its own, and therefore deserving of its own full-blown article treatment in the coming weeks and months (stay tuned readers!)