October 10, 2012
Amazon to Sell Advertising and Lower Prices
Amazon.com has been accused of profiting from an unfair advantage in the past because it wasn’t compelled to collect sales taxes in some states in which other retailers were required to do so. It has also been recognized that Amazon’s operating model gives it a pricing advantage over competing brick and mortar stores. Now, Jeff Bezos and company have come up with another means to generate revenue with the stated intention of lowering the prices of goods it sells — advertising.
One of the first indicators of Amazon’s direction came in April when Mr. Bezos addressed a letter to consumers to explain how the company was able to offer Kindle at a lower price.
"We took our bestselling Kindle and made a version with special offers and sponsored screensavers. Companies sponsor the screensavers, you pay less for the Kindle," Mr. Bezos wrote. "Plus you receive offers directly on your Kindle that can save you more money, such as a $20 Amazon Gift Card for $10, six Audible Books for $6, and an album from Amazon MP3 Store for $1."
Lisa Utzschneider, Amazon’s global head of advertising, recently told Ad Age, that the company offers marketers opportunities across its "ecosystem," including via products such as the Kindle, company websites (Amazon.com, Diapers.com, Zappos.com, etc.), and Amazon’s international platform with sites in North America, Europe and Japan.
Ms. Utzschneider said data shared with advertisers is a major strength of the Amazon platform.
"We have pretty advanced targeting capabilities. They fall into two buckets — one is lifestyle and one is in-market," Ms. Utzschneider told Ad Age. "Lifestyle is the broader part of the funnel and consists of categories like fashionista, gadget geek, mom or coffee enthusiast. Further down the funnel within categories — has this person looked at consumer electronics products? That’s the kind of audience segment information that we share."
BrainTrust
Recent Discussions
Discussion Questions
How will Amazon.com’s advertising platform affect the company’s competitive position with other retailers? How do you expect other retailers to respond?
Poll
Amazon has a huge shopper base and is using the information it has on those customers to allow advertisers to reach them. This is no different than other Internet retailers. Amazon just hopes to do it better. Much better.
The BrainTrust has frequently discussed big data and how retailers should use it. Amazon has chosen to invest in it and then monetize it. Other retailers should do the same. Generic loyalty programs can’t compete in 2012. Retailers need to use consumer data to make their advertising and shopping experience more relevant.
Yet another terrific strategic move by Amazon to enhance their brand engagement with the consumer.
American consumers have had the opportunity to be influenced by advertising by a wide variety of media. Digital media continues to rise in influence for all categories of retail.
In addition, Amazon’s virtual store, plays into this mix. The BIGinsight Media Behaviors & Influence Study of 24,000+ Adults, points to the fact that in-store is one of the top 5 media forms, out of 30, in influencing purchase in the retail channel.
Amazon is in a unique position compared to most retailers, because it sells digitally delivered media content (books and movies) along with “real” merchandise. And the company demonstrated the power of good data mining a long time ago, when it gave “targeted recommendations” to customers based on their purchasing and browsing patterns. Using its platforms as an advertising vehicle, not just a content vehicle, is a powerful business model — just ask the TV and cable networks. It’s a lesson that most of its digital competitors (especially Facebook) have yet to master.
As a consumer it’s hard not to love Amazon. I like to avoid ads intruding in my space everywhere…yet Amazon executes so well with customers. It’s a win/win on the ads. The capital they generate can be used to further satisfy customers, their own Kindle development, and continue to compete. Ads have already crept into my iPhone apps, so I imagine this will continue with retailers. This approach needs to be executed with discretion and value, or customers leave/opt out.
I have never really viewed Amazon as a retailer, but more as an expert in supply chain solutions. Their ability to rapidly move products to the right people at the right time at the right price is impressive. Amazon understands that the key to driving more customers to its near perfect supply chain is to make it more accessible and the Kindle does just that. Subsidizing the cost of the Kindle through advertising does just that.
Brands and actually competitive retailers may find the advertising opportunity appealing. If customers are going to use Kindle as their shopping platform, wouldn’t you want to have an opportunity to speak with customers that index high with your offering?
Rumor has it that same-day delivery from Amazon is coming. Imagine buying a new 50″ plasma TV and it being delivered in less than 4 hours. It’s coming and how they plan to pull it off will only further prove that they are a near perfect supply chain solution.
You have to own the ecosystem before you can leverage it. We’re already seeing other retailers choose not to sell the Kindle. I sure wouldn’t if I were Target or any other competitor of Amazon.
Looking at moves like this, it’s hard not to note some rather frantic scrambling at Amazon. Perhaps the Toys “R” Us CEO has it correct — that there really isn’t a cost advantage for Amazon any more and that brick and might be more capital intense, but per product a more cost effective distribution method.
For other questionable Amazon moves I think back to their release of an application to encourage showrooming. An odd strategic choice — choosing to poke the tiger in the eye. Would have been much wiser to let things fly under the radar.
Only time will tell. But I see a measure of scrambling in all these moves — scrambling that suggests not all is as perfect at Amazon as the business press might suggest.
Amazon does it better than anyone else in the online business, and the new ads can only help grow their profits even more. It is going to keep people shopping on their site, as long as the advertising is timely, needed, and priced right, which I am sure it will be.
I believe that consumers will tolerate the advertisement in exchange for lower pricing. The lower pricing is, however, the key here. The minute that the consumer feels that Amazon is manipulating the price of a product upward in order to discount it, the consumer will revolt! Other retailers will largely not respond because they don’t have a clue how today’s retail environment works.
The first sentence of the AdAge article says it all: “There’s no more customer-obsessed company than Amazon, which has long forsaken high profits in pursuit of giving shoppers the best possible experience and the lowest possible price.”
Amazon’s advertising platform is a logical and prudent extension of the benefits such a customer-centric strategy. It only impacts other retailers marginally, to the extent that it reaches their customers with messaging, which it already does. It’s up to those retailers to enable themselves to compete on some dimension and/or fulfill the demand that Amazon creates. As good as Amazon is, it doesn’t close the sale 100% of the time! That said, it sure closes the sale more than most other retailers do, and that is not going to change.
On one side, Amazon competes with other retailers. However, advertising on retail websites is neither new (it’s been going on a long time) nor unique (they didn’t invent it).
In the long term, however, Amazon’s advertising solutions compete less with other retailers than with Google. Amazon must build a network of sites because Google has much more real estate than it does (the universe of search terms).
Google has said 25-30% of all searches online are product-related. This search volume, in addition to the commerce volume that it drives, is Amazon’s true target with Google. If Amazon can become the source of product-related searches, fewer people will start their searches at Google. This would give Amazon more opportunities to display both products and advertising.
What’s also not mentioned is the margin edge that Amazon gets from advertising. Advertising is a great source of profit, and potentially an escalating one as cost per ad becomes more competitive. This escalating source of profit can be used by Amazon to lower prices and keep their flywheel going.
When you provide the best customer service of any retailer in the country, you generate huge numbers of loyal customers.
When you generate huge numbers of loyal customers, you are able to leverage them to generate new streams of revenue.
Amazon understands that profitability is not all in the margin of the product that you sell.
Amazon’s platform is going to be very competitive with other major online advertising businesses (Google, Facebook, etc.) and it’s already a strong business for them. Unlike selling goods, it’s a high margin business and it will make Amazon stronger as a whole and provide them with more resources to continue disrupting additional retail categories.
Other retailers should not let this distract them by trying to compete directly; almost none have the components in place to copy this move. Instead it should be another reason for retailers to redouble their commitment to competing on their own points of differentiation.
It has been said, “You can imitate, but you can’t duplicate.” Many are trying. Many are failing. Many are scratching their heads. Amazon has been thinking about it, planning it, and analyzing it longer than anyone.
I expect that too many other retailers will do the same with Amazon as they have done for years now with Walmart. They will hand wring and sing their woes. Few will be able to respond or if they do, they will do so with little or no real equivalent response.
Visionaries such as Amazon also execute. Once the roll begins, there is so much activity that others can’t even figure out which strategy to respond to in the first place.
Responding to other retailers is not a strategy. Other retailers’ lack of vision and ability to execute is so much more than a disadvantage today. It is a sentence of mediocrity or worse — death
If anything, this is a great opportunity for brick-and-mortar retailers to compete with Amazon. For complex goods like electronics, people may be doing their purchase research online, but ultimately prefer to buy it in person at a store nearest them. That way, they can touch and the try the products, not to mention have a dealer they can go to for additional support and service. The trick is to offer (beyond a compelling Amazon ad) competitive pricing and a great in-store shopping experience.
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Amazon has a huge shopper base and is using the information it has on those customers to allow advertisers to reach them. This is no different than other Internet retailers. Amazon just hopes to do it better. Much better.
The BrainTrust has frequently discussed big data and how retailers should use it. Amazon has chosen to invest in it and then monetize it. Other retailers should do the same. Generic loyalty programs can’t compete in 2012. Retailers need to use consumer data to make their advertising and shopping experience more relevant.
Yet another terrific strategic move by Amazon to enhance their brand engagement with the consumer.
American consumers have had the opportunity to be influenced by advertising by a wide variety of media. Digital media continues to rise in influence for all categories of retail.
In addition, Amazon’s virtual store, plays into this mix. The BIGinsight Media Behaviors & Influence Study of 24,000+ Adults, points to the fact that in-store is one of the top 5 media forms, out of 30, in influencing purchase in the retail channel.
Amazon is in a unique position compared to most retailers, because it sells digitally delivered media content (books and movies) along with “real” merchandise. And the company demonstrated the power of good data mining a long time ago, when it gave “targeted recommendations” to customers based on their purchasing and browsing patterns. Using its platforms as an advertising vehicle, not just a content vehicle, is a powerful business model — just ask the TV and cable networks. It’s a lesson that most of its digital competitors (especially Facebook) have yet to master.
As a consumer it’s hard not to love Amazon. I like to avoid ads intruding in my space everywhere…yet Amazon executes so well with customers. It’s a win/win on the ads. The capital they generate can be used to further satisfy customers, their own Kindle development, and continue to compete. Ads have already crept into my iPhone apps, so I imagine this will continue with retailers. This approach needs to be executed with discretion and value, or customers leave/opt out.
I have never really viewed Amazon as a retailer, but more as an expert in supply chain solutions. Their ability to rapidly move products to the right people at the right time at the right price is impressive. Amazon understands that the key to driving more customers to its near perfect supply chain is to make it more accessible and the Kindle does just that. Subsidizing the cost of the Kindle through advertising does just that.
Brands and actually competitive retailers may find the advertising opportunity appealing. If customers are going to use Kindle as their shopping platform, wouldn’t you want to have an opportunity to speak with customers that index high with your offering?
Rumor has it that same-day delivery from Amazon is coming. Imagine buying a new 50″ plasma TV and it being delivered in less than 4 hours. It’s coming and how they plan to pull it off will only further prove that they are a near perfect supply chain solution.
You have to own the ecosystem before you can leverage it. We’re already seeing other retailers choose not to sell the Kindle. I sure wouldn’t if I were Target or any other competitor of Amazon.
Looking at moves like this, it’s hard not to note some rather frantic scrambling at Amazon. Perhaps the Toys “R” Us CEO has it correct — that there really isn’t a cost advantage for Amazon any more and that brick and might be more capital intense, but per product a more cost effective distribution method.
For other questionable Amazon moves I think back to their release of an application to encourage showrooming. An odd strategic choice — choosing to poke the tiger in the eye. Would have been much wiser to let things fly under the radar.
Only time will tell. But I see a measure of scrambling in all these moves — scrambling that suggests not all is as perfect at Amazon as the business press might suggest.
Amazon does it better than anyone else in the online business, and the new ads can only help grow their profits even more. It is going to keep people shopping on their site, as long as the advertising is timely, needed, and priced right, which I am sure it will be.
I believe that consumers will tolerate the advertisement in exchange for lower pricing. The lower pricing is, however, the key here. The minute that the consumer feels that Amazon is manipulating the price of a product upward in order to discount it, the consumer will revolt! Other retailers will largely not respond because they don’t have a clue how today’s retail environment works.
The first sentence of the AdAge article says it all: “There’s no more customer-obsessed company than Amazon, which has long forsaken high profits in pursuit of giving shoppers the best possible experience and the lowest possible price.”
Amazon’s advertising platform is a logical and prudent extension of the benefits such a customer-centric strategy. It only impacts other retailers marginally, to the extent that it reaches their customers with messaging, which it already does. It’s up to those retailers to enable themselves to compete on some dimension and/or fulfill the demand that Amazon creates. As good as Amazon is, it doesn’t close the sale 100% of the time! That said, it sure closes the sale more than most other retailers do, and that is not going to change.
On one side, Amazon competes with other retailers. However, advertising on retail websites is neither new (it’s been going on a long time) nor unique (they didn’t invent it).
In the long term, however, Amazon’s advertising solutions compete less with other retailers than with Google. Amazon must build a network of sites because Google has much more real estate than it does (the universe of search terms).
Google has said 25-30% of all searches online are product-related. This search volume, in addition to the commerce volume that it drives, is Amazon’s true target with Google. If Amazon can become the source of product-related searches, fewer people will start their searches at Google. This would give Amazon more opportunities to display both products and advertising.
What’s also not mentioned is the margin edge that Amazon gets from advertising. Advertising is a great source of profit, and potentially an escalating one as cost per ad becomes more competitive. This escalating source of profit can be used by Amazon to lower prices and keep their flywheel going.
When you provide the best customer service of any retailer in the country, you generate huge numbers of loyal customers.
When you generate huge numbers of loyal customers, you are able to leverage them to generate new streams of revenue.
Amazon understands that profitability is not all in the margin of the product that you sell.
Amazon’s platform is going to be very competitive with other major online advertising businesses (Google, Facebook, etc.) and it’s already a strong business for them. Unlike selling goods, it’s a high margin business and it will make Amazon stronger as a whole and provide them with more resources to continue disrupting additional retail categories.
Other retailers should not let this distract them by trying to compete directly; almost none have the components in place to copy this move. Instead it should be another reason for retailers to redouble their commitment to competing on their own points of differentiation.
It has been said, “You can imitate, but you can’t duplicate.” Many are trying. Many are failing. Many are scratching their heads. Amazon has been thinking about it, planning it, and analyzing it longer than anyone.
I expect that too many other retailers will do the same with Amazon as they have done for years now with Walmart. They will hand wring and sing their woes. Few will be able to respond or if they do, they will do so with little or no real equivalent response.
Visionaries such as Amazon also execute. Once the roll begins, there is so much activity that others can’t even figure out which strategy to respond to in the first place.
Responding to other retailers is not a strategy. Other retailers’ lack of vision and ability to execute is so much more than a disadvantage today. It is a sentence of mediocrity or worse — death
If anything, this is a great opportunity for brick-and-mortar retailers to compete with Amazon. For complex goods like electronics, people may be doing their purchase research online, but ultimately prefer to buy it in person at a store nearest them. That way, they can touch and the try the products, not to mention have a dealer they can go to for additional support and service. The trick is to offer (beyond a compelling Amazon ad) competitive pricing and a great in-store shopping experience.