Recent news reports brought to light Amazon’s efforts over the last few months to prevent vendors from advertising products which lose money for the eCommerce giant. Vendors that sell these products are told the only way to become eligible again is to lower the prices they are charging Amazon for affected products.
While Amazon has long paused ads for products whenever competitors such as Walmart forced Amazon to price match at a level that was unprofitable, vendors would formerly be allowed to advertise once prices went back up and Amazon could realize a profit. The newer communication implores vendors to lower prices or else remain suspended.
This is a rational decision for Amazon, as it would obviously prefer products which actually produce margin to fill the promoted product listings. However, the recent reports highlight a key difference between Amazon and the other advertising giant it is often measured against, Google.
Making Money is Better than Not Making Money
The products in question cost enough to package and ship to cause a net loss on actual order fulfillment for Amazon when taken together with the price paid to vendors for the product. This amounts to Amazon restricting ad availability for products based on its own margin when fulfilling orders, instead of filling Sponsored Products based solely on cost-per-click (CPC) bids placed by advertisers.
Interestingly, advertising dollars might actually make the full journey from click to conversion a net positive for Amazon so long as the CPC outweighs the losses from order fulfillment. However, if Amazon can feature product ads which produce similar CPC as well as a positive margin on order fulfillment, its bottom line naturally benefits.
This represents a dynamic that Google isn’t subject to with its own paid search results.
Shopping Actions Muddy the Waters, but Google Advertising Ecosystem Still Very Different from Amazon
Google does have its own marketplace called Google Express, which it uses to power Shopping Actions listings which can be featured alongside traditional pay-per-click (PPC) Shopping ads. In the case of clicks on Shopping Actions, Google only makes money when the user converts. This contrasts with PPC ads which require advertisers to pay once an ad is clicked, with no revenue passing to Google in the event of a conversion.
In addition to the Shopping carousel, Shopping Actions also appear on Google Express and also power voice shopping through the Google Assistant.
Google has to weigh the likelihood of a conversion when a user clicks through Shopping Actions and what that conversion rate means for the commission it receives compared to the expected cost-per-click of that same user clicking through a traditional Shopping ad. It does not, however, include the likelihood of a conversion once a user has clicked through a traditional ad in determining that ad’s eligibility to show in search results. It has no incentive to, if it’s optimizing ad results to produce the maximum CPC (though the advertiser that can afford to bid the most typically has the highest expected sales revenue per click).
Further, the products that are excluded from showing ads on Amazon are sold wholesale to Amazon by vendors. None of the products being sold on Google Express are sold wholesale to Google, and all order fulfillment responsibilities are on the participating retailers. Thus, there’s no situation in which an order through Google Express produces a negative margin for Google.
So while traditional Shopping ads may be displaced by Shopping Actions as a result of the likelihood that a user will convert through Google Express, advertisers aren’t prevented from participating in the auction as a result of the actual profitability of fulfilling orders for their own products. This is a big difference between Google and Amazon.
Why would Amazon or any other retailer sell a product at a price with negative margin? There are several rational reasons, including offering a lower price during a product’s initial launch to allow consumers to try it out cheaper and using loss leaders to attract customers to other offerings.
In the case of Amazon, there are also well-documented examples of it using aggressive product and shipping pricing to apply pressure on competitors, such as diapers.com. After it refused to sell to Amazon, Amazon slashed diaper prices by as much as 30% and provided other incentives that resulted in significant financial loss. Looking at a price war that could lose hundreds of millions of dollars, diapers.com soon sold to Amazon.
At this stage of its development, Amazon is more focused on producing profits, with its advertising business providing a boost in this regard. But while it may be less inclined to lose money now compared to a few years ago, it’s still clearly willing to sell products at an unprofitable price, even if it no longer wants to allow these products into its ad space.
From an advertiser’s point of view, what can be done?
Vendors Selling CRaP Will be Limited
If the vendors selling products that Amazon can’t realize a profit (CRaP) on are already giving Amazon the lowest price possible (likely, given Amazon’s aggressive push for low prices from its vendors), there’s not much that can be done. Particularly for items with prices less than $10, however, advertising might not have been a very profitable endeavor anyway.
For those vendors which do have the ability to drop prices to Amazon, it’s worth considering if such a move would be worthwhile to maintain visibility in the sponsored results. However, these vendors need to consider not only the cost of advertising as it relates to the reduced margin resulting from lower prices, but also how such pricing might affect other channels. Amazon is a big fish (around half of all US ecommerce sales) in a little pond (ecommerce only about 10% of total US retail sales), and it’s important to keep the rest of the open water in consideration when weighing pricing changes.
Alternatively, advertisers impacted by these measures could move to become a third-party seller as opposed to a vendor wholesaling to Amazon. Amazon doesn’t restrict advertising to sellers since it sees a commission on every sale and isn’t responsible for shipping unless the seller is using Fulfillment by Amazon services, in which case Amazon is paid by the seller for product storage and order fulfillment. While some brands have reported that Amazon refuses to allow them to participate in the marketplace as a third-party seller, many vendors will have the option to become a third-party seller available.
Entanglement of Amazon’s Retail and Ad Business Not Going Away
This isn’t likely to be the last we hear of changes made to Amazon ads which reflect the fact that Amazon’s best interest lies not in maximizing ad revenue, but in maximizing the total revenue derived from both ad clicks and conversions. As such, it’s not hard to understand why Amazon would disallow unprofitable products from appearing in sponsored listings.