Jeff Campbell, president of aiCommerce
According to Digital Commerce 360, Amazon represented ~41% of U.S. ecommerce sales in 2020 and has turned record profits every quarter since the start of the pandemic, with Walmart as #2. Amazon also achieved $21.45 billion in digital advertising revenue.
By all indications, 2021 totals for both categories continued these record-setting trends. Driven by continued ecommerce growth, advertising ROI, growing competition from brands, and increased focus on upper-funnel ads, “the roaring 20s” will continue to expand retail media and Amazon’s share of the media pie.
Retailers must understand one of the most fundamental differences of advertising via ecommerce marketplaces: Retailers cannot achieve success by focusing only on optimizing the ads themselves, bid prices, ad copy, targeting, etc. Marketplace success requires other, behind the scenes planning and foundation building, all in the name of generating sales velocity. Retailers who make sacrifices to generate sales velocity get rewarded handsomely over the long run in this fast-growing channel.
As the new year begins, here are five recommended digital marketing initiatives that can help retailers excel in ecommerce marketplaces in 2022, whether they are just getting started or expanding an already successful effort.
1: Calculate a breakeven ROAS at the product level
Selling on marketplaces is a marathon, not a sprint. Rarely does a seven-figure seller emerge in a matter of months. Sellers need to plan to invest a minimum of $100,000-plus and 6 to 8 months before turning a profit. Another common pitfall for brands is not managing to SKU-level profitability, favoring a blanket return on ad spend (ROAS) goal and disregarding net margin dollars. For example, hitting a $6 ROAS goal (17% advertising cost of sales [ACOS]) for a $125 item and a $20 item is important. Still, a savvy seller understands that the additional margin dollars the $125 item yields are how they maximize profitability in an extremely competitive space.
Brands must understand their contribution margin (CM) at the product level and be comfortable with breakeven returns in the initial periods to stimulate sales, reviews, and organic rankings. Determining breakeven goals entails understanding the cost of goods sold (COGS), selling and shipping costs, and any third-party fees or commissions. Subtracting these variable costs from the average order value (AOV) provides the CM. A little math generates a breakeven ROAS (or ACOS). Then brands can empower technology to utilize margin-based bidding to maximize revenue at breakeven CM levels through algorithms and ongoing optimizations. Once a retailer gains momentum, it’s time to right-size budgets for growth and profitability stages.
2: Right-size budgets (and expectations) for Amazon
Amazon will account for 78% of retail media market spending in 2021 and its 56% growth rate outpaced the overall U.S. digital ad market growth of 38%. The influx of competition from abroad and traditional companies launching direct-to-consumer (DTC) units is driving CPCs up. Amazon courts large multinational brands and non-commerce companies (e.g., financial services) for brand building via demand-side platforms (DSPs) and streaming T.V. ads. Budgets are being drawn in from national T.V. buys and social media. The impending cookie depreciation and industry privacy regulations will drive more advertisers to Amazon’s closed-loop measurement and advertising platform.
To determine the correct advertising budget for a product on Amazon, retailers must identify the highest ROAS/ACOS and conversion rate (CVR) keywords, then estimate the cost of maximizing exposure at breakeven levels to stimulate sales and, ultimately, organic rankings.
First, choose and utilize third-party tools to understand search volume, optimization benchmarks, and sales requirements for ranking. The following output is for the search query of “hot honey.”
To rank high organically for these ~7,000 monthly searches, a retailer now has comparative benchmarks for reviews, pricing, revenue, and more. Like Google, the goal is always the ‘free’ organic traffic versus paying for every click, but sellers will always need both. Brands accustomed to defending their search position and taking business from their rivals on Google must now adapt these strategies to Amazon, etc. If a retailer optimizes a product organically but is not getting natural rankings, that is likely due to low sales velocity. The retail must use paid advertising to kickstart the flywheel.
Next, retailers need to estimate the necessary sales volume to rank above the fold on page one. For the “hot honey” query, another tool estimates ~40 products need to be sold from this keyword to rank well organically. Otherwise, it’s time for the brand to buy its way in. Assume a 10% CVR for the product, meaning at least 400 weekly visitors are needed to yield 40 orders. With average CPCs around $1.00, that’s a $400/week investment. At an AOV of $24, 40 sales yield $960 in revenue resulting in a $2.40 ROAS (42% ACOS). This is where knowing the product-level breakeven point comes in handy, and it may require a short-term loss to help spur sales and organic rankings as Amazon observes sustainability in the operational metrics (inventory, fulfillment).
As a retailer compiles similar analyses for top keywords, they reach initial budget estimates and employ technology to manage product margin goals and organic profitability.
3: Explore marketplaces and retail media beyond Amazon
2022 offers a chance to test marketplaces beyond Amazon. While Amazon is nearing an 80% consumer market share, ecommerce brands will encounter 99% of their competition and most of their digital budgets on Amazon. Amazon CPCs are rising ~30% year over year. Head for greener pastures such as Walmart, eBay, or Target. Walmart and eBay have solid interfaces, good/growing ad products, and low barriers to entry. aiCommerce currently has a few clients seeing more sales and better ROAS on secondary marketplaces versus Amazon due to lower competition and CPCs. Like Amazon, maximizing success requires experience, process, and technology.
The emerging “retail media” moniker refers to digital ads that appear on retailers’ owned and operated websites and apps. Also included are digital ads appearing off-site, powered by retailers’ first-party data. From Walmart Connect to Lowe’s One Roof Media Network, significant retailers let participating advertisers access consumer behavioral data to target and measure sales impact. Unfortunately, many retailers have not yet allowed online-only sellers on their marketplaces and require approval through traditional merchant/buyer channels with a wholesaler/first-party (1P) relationship. Brands should work through retail reps and buyers for in-store shelf approval – it’s painstaking with many, but worth it to generate that much-needed sales velocity!
As traditional retailers leverage their trove of omnichannel/offline data for targeting and measurement, their growing retail media offerings represent a considerable advantage over Amazon – and are cutting into Amazon’s budgets. For example, 90% of grocery sales still transact in-store, and brands seek online-to-offline attribution with multifaceted media investments.
4: Build a brand
Amazon is the world’s largest price comparison engine – but can a brand compete solely on price? Especially with recent supply chain issues, many brands have found out that cheaper overseas competition is better positioned than anticipated. This said, “you get what you pay for” is not lost on today’s price-conscious consumers.
Over the past decade of digital advertising, numerous examples exist of brands that didn’t diversify into upper-funnel ad formats and watched their Google (or Facebook) CPCs rise as margins got thinner and thinner; marketplaces will be no different. Sponsored Product ads CPCs are increasing due to competition but still driving solid returns.
Savvy consumers visit retail websites and Instagram feeds and read reviews before purchasing to see what the brand stands for. Consumers are influenced by advertising beyond promoted product listings on results pages. Ad platforms allow targeting distinct personas and behaviors which drive measurable actions. Lifestyle attributes, affinities, and behaviors become more important if a brand can’t win on price.
People pay more for brands – just ask Apple, GoPro, Nerf, or Mercedes. Reliability, customer service, quality, lifestyle attributes, etc., matter. A common pitfall for most ecommerce-first brands is over-focusing on advertising at the product level at the expense of lower converting, upper-funnel ad types. Product advertising is an essential part of the mix but shouldn’t represent the entire mix. Successful companies will build a brand, cross-sell, and measure lifetime value (LTV); Amazon does make some of that difficult, but aspects are improving. For example, Amazon’s Connected T.V. has the potential to disrupt T.V. advertising as we know it via targeting, segmentation, interactivity, and closed-loop sales attribution. With tomorrow’s sales velocity in mind, 2022 is the time to fill the funnel by testing DSPs and retail media networks and inserting Marketplace storefronts into Search and Social campaigns.
5: Direct “traditional” digital channels to marketplaces
Brands historically preferred directing their digital ad campaigns (e.g., Google, Facebook) to their websites to avoid third-party marketplace commissions and to own the relationship with the consumer (and their first-party data!). Marketplaces tend to have 3-10x the conversion rate (~10% average CVR) with similar CPCs. Facebook and Google traffic, used together, can help increase the velocity of marketplace sales and positive reviews – two major drivers of organic algorithms/rankings.
Our clients have gotten boosts from organic Amazon rankings and overall sales when bringing in outside traffic. The Amazon Attribution beta now provides ROI feedback on these tactics as well. When launching new products, new marketplaces, or seeking a higher converting click rate, conduct tests pairing “traditional” digital channels with marketplaces to help spur revenue.
2022 will see digital marketing continue to age in dog years, where every one year equals seven. Test smart opportunities, embrace change, and partner with like-minded entrepreneurs!
aiCommerce, is a digital marketing agency focusing on ecommerce and retail marketplaces.
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