Amazon is quickly making strides in the online advertising market, which is expected to top $88 billion this year. This is a crowded market: Big players such as Google and Facebook, hold over 50 percent of the market share, and other significant players, such as Microsoft, Oath, Twitter, and Amazon, are vying for the rest. Amazon’s share is in the low single digits, but it is likely to grow quickly, and the big players are taking notice given the unique advantage Amazon has among the crowded field.
Amazon’s unique advantage
To understand the unique advantage of Amazon, it might be useful to understand what marketers gain from advertising online. Marketers benefit when they acquire customers at the lowest cost.
Google and Facebook provide marketers access to the online traffic they control and use sophisticated targeting algorithms to match a marketing message to the right set of online users. To the extent that this targeting is effective, marketers will benefit, as precise targeting increases click-through rates and lead to conversions with lower acquisition costs. But the effectiveness of this targeting also depends on the motivations of the online users as they surf different websites.
For example, a visitor at Facebook may be there to interact with his friends. A visitor at Google may be searching for some content related to her studies. Even when Facebook or Google applies the context-dependent targeting of a marketer message to these visitors, since their motivations are different, the likelihood of their acting on the marketing message immediately is low. As a result, click-through rates may be low, and acquisition costs may increase. Contrast this with an Amazon visitor’s motivation — shopping!
When Amazon visitors see a context-appropriate marketing message, the chances are much higher that they will react to it, increasing click-through rates. Since visitors are already in the mindset of shopping at Amazon, relevant marketing messages can be very successful at getting visitors’ attention, ultimately resulting in lower acquisition costs.
Adding to the above advantage is the nature of the data Amazon has on its shoppers. Amazon has panel data on its shoppers from the start of their relationships with Amazon. Amazon knows exactly what items customers have purchased, how much they paid for those items, and how price-sensitive they are.
Furthermore, since the platform is a marketplace, Amazon also knows what items customers purchased from its third-party sellers and how much customers paid for those items. Amazon can use the data to understand how its customers’ preferences have evolved, as well as what items its customers are likely to purchase in the future and what prices would be appealing to them.
Even if Amazon has only a few data points on a visitor at its website, it can use other customer data to predict what the visitor may be looking for and how she will be behave when she encounters online ads using techniques such as collaborative filtering. Amazon can apply machine learning and artificial intelligence techniques to the data to provide recommendations and present the right marketing messages. All of these factors lead to the much more precise targeting of customers who are already in the shopping mindset, thereby increasing click-through rates for marketers.
Amazon can cash in on this success by charging a little more for displaying the online ads on its website, as they are more effective, and marketers may benefit as their acquisition cost could be lower than when they advertise at Facebook or Google. Amazon Prime shoppers are an especially attractive segment for marketers to go after, and Amazon could charge even more for online ads targeting them.
The walled garden
Amazon is a walled garden. It controls all the content that appears on the e-commerce platform. If a marketer were to place an ad on Google’s YouTube or Facebook, it may have to worry about the type of content with which its ad would appear, as users post the content. There is a danger that the ad might be placed next to a hate speech video or inappropriate content, thereby harming the brand. When the marketer advertises on Amazon, there is no such worry, as Amazon controls the content in the platform. This reduces the risk for the marketer, who would thus be willing to pay more for such ads on Amazon.
Finally, there are some indirect benefits (positive spillovers) for marketers when they advertise on Amazon. Since Amazon’s targeting can be very precise, marketers brands can become more prominent with the shoppers quickly. First, this may enable the marketers to build relationships with the customers they acquire on the Amazon platform. Second, increased brand prominence also helps organic search rankings and helps marketers get higher placements for paid search at search sites such as Google and Bing without any increase in cost.
All of these aspects point to a robust growth in online advertising revenue for Amazon in the coming years — at the expense of its big competitors!
P.K. Kannan is the Dean’s Chair in marketing science in the Robert H. Smith School of Business at the University of Maryland and a leading industry expert in marketing data, analytics, and consumer behavior.