With near daily news stories regaling us with Amazon’s incredible ad business growth (129% YoY in Q2 according to Digiday), you’d be hard pressed to avoid it’s growing impact on digital advertising strategy.  Many retailers have experienced strong ACoS (Advertising Cost of Sale: Amazon’s inverse ROAS metric) advertising on Amazon’s platform, adding to its allure. Despite the opportunities on Amazon’s platform, you should evaluate Amazon performance differently than other digital media channels as you go about finalizing your holiday budgets.

For a number of reasons (including not owning the customer experience or data), $1 of Amazon revenue is not equal to $1 of revenue from other marketing channels like Google or Facebook. It’s important to weigh the different considerations that should factor in your evaluation of Amazon performance.

Evaluate total revenue & performance with Amazon impact in mind

Companies need to evaluate the total impact of ad dollars against total digital revenue. When you begin selling/advertising* on Amazon, make sure that holistic evaluations combine both website sales and Amazon sales against total advertising dollars. Once you start selling/advertising on Amazon, don’t be surprised if your overall website sales are down. That’s not necessarily a bad thing if the Amazon revenue increases have outpaced the decreases from your website sales, but Amazon sales are not entirely net-new. They will cannibalize some of your existing website sales.

*Advertising on Amazon and selling on Amazon are nearly the same thing. In many Amazon categories, ads take up 100% of the above-the-fold space and more beyond that. If you want to generate significant sales on Amazon, you have to run ads there.

It is common to see new Amazon revenue come at the expense of your Google Search & Shopping revenue. That cannibalization comes from both Amazon organic listings on Google and Amazon paid ads on Google (text and Shopping ads). If you sell on Amazon, Amazon will show up high in the organic listings on Google for your brand terms and Amazon will often run paid ads on your brand terms.

Factor in Amazon’s “cut”

Independent of any ad dollars spent on Amazon, Amazon is also taking a 6 to 20% “selling fee” on all products you sell on its platform. You should add this directly into your ACoS or ROAS calculations when measuring the performance of your Amazon ads. While other costs (manufacturing, inventory, packaging, etc.) should be relatively consistent regardless of where you are generating your sales, this “selling fee” can make a big difference.

If you are selling clothing on Amazon and starting at a 23% ACoS on Google non-brand search vs. an 18% ACoS on Amazon ads, then Google is almost certainly more profitable. With a 17% Amazon selling fee, your true Amazon ACoS is closer to 35%. Make sure your regular Amazon ad reporting has some way of incorporating this.

$1 Does Not Equal $1 – Owning the Customer Relationship

When a consumer purchases one of your products on Amazon, you lose the customer relationship, the customer experience, and the data. While those are all difficult to quantify, they are all definitely a net negative compared to the consumer purchasing directly through your site.

Why is that? A consumer buying through Amazon does not experience your website, branding, or messaging. The user experience on Amazon is generally great: easy one-click checkout processes, free two day shipping for Prime members, etc. but it is also Amazon’s experience. When that consumer makes the purchase, Amazon is also the one who gets the customer data and information, as well as any brand loyalty. What is the impact of all this?

  1. You will have fewer repeat purchasers direct through your site. Consider your last Amazon purchase – do you remember the name of the seller you purchased from? Because the customer has not gone through your website experience for that most recent purchase, they’re unlikely to come back and do so the next time. This means more seller fees for each additional purchase on Amazon.
  2. Your email marketing sales could go down. Email is typically a very high ROI channel, but without collecting new emails for Amazon purchasers, you will lose the ability to email market to them in the future.
  3. You will have a smaller remarketing cookie pool, which means fewer remarketing sales. Similar to email, without as many visitors coming through your site, your remarketing cookie pool (and corresponding revenue) will decline as well.
  4. You will struggle more to distinguish yourself from competitors. Your website will always be your most important piece of marketing collateral. Without impacting the customer experience and putting your own brand stamp on it, you and your products become more commoditized. When I purchase through Patagonia’s website, for example, I learn about their commitment to corporate responsibility, IronClad guarantee (easy returns and quality assurance policy) and stunning imagery from the world’s oceans, mountains, and rivers. All of those contribute to my allegiance to that brand. The purchase on Amazon is much more transactional, and the experience is the same whether I’m buying new outdoors equipment, a video game, or a coffee press.
  5. You will be less effective at targeting on other channels. Lookalike modeling on Facebook, search remarketing campaigns on Google, and automated bidding on all platforms rely on data density that decreases as traffic and purchases are shifted to Amazon.

For all those reasons, we recommend that you require a lower ACoS on Amazon ads than other channels (put another way: you should demand a higher return on ad spend from Amazon than other channels). If you compare Amazon ads to a social channel like Instagram, for example, you must take into account that the highly visual and brand-aligned Instagram ad will have impact beyond the direct ROAS it drives. It will also positively impact future site visits, remarketing cookie pool growth, brand searches, and other metrics that drive impact revenue growth. You should therefore hold Instagram to a different standard.

Should Retailers Avoid Amazon?

Many advertisers should be investing more, not less on Amazon and Amazon Ads, provided it is right for their business. However, it is vital that those decisions weigh Amazon performance and revenue against the reality of selling fees and lost brand experience. Amazon is a high-volume sales and marketing channel. If you have healthy enough margins and the above data/customer concerns are not a roadblock, then you should at least consider selling and advertising a few products on Amazon. Treat it as a marketing expense to generate brand awareness on one of the largest shopping channels. You may even be able to generate more website sales if you are careful with your product choice and make consumers come directly to you for the rest of your products.

Whatever your breakdown in budgets and channels this Q4, make sure your digital media spend and digital sales aren’t evaluated in a silo.

Need help running your Amazon ads? Contact Metric Theory for a growth discussion!