It’s Not Enough to Make a Product

Last year Google’s advertising revenue was $95.3 billion. The year before it was $79.3 billion. Google represents 33% of the world’s advertising spend. The bulk of that is through the Google AdWords service, which allows advertisers to put their websites alongside results Google’s search algorithm deems to be the most relevant.

There are more relevant websites than Google could ever surface. Thus most people click the first few results in the search, hoping that it is what they were looking for. And in most cases it is. But for websites ranked below, or in page two or five, they never get any clicks. Thus those websites, beyond optimizing for search engines known as SEO, often pay for advertising to be the first result people see.

Google is a pay-to-play platform because being the first search result is extremely valuable and many can generate a positive ROI by paying to be at the top.

Amazon and other e-commerce platforms are taking the same route. They too have many more different products than a search query could surface, and being the first search result is extremely valuable. This is why Amazon’s advertising business has been receiving so much attention - it has become not a tool to boost sales, but instead a requirement to get any sales. At least initially.

Amazon Advertising revenue - Financial Times

As a result Mark Mahaney, analyst at RBC Capital Markets, estimates that by 2022 Amazon’s ad revenues will top $25 billion.

Shannon Bond wrote in the Financial Times that “Amazon has advised some merchants to double or even triple their overall ad spending and the amount of money they bid on keywords if they want to get their products at the top of search results.” Eugene Kim of CNBC wrote “it now costs third-party merchants $750 to run each Lightning Deal, up from $500 last year” when talking about the upcoming Prime Day. There is more demand to be at the top of search results, to be featured in lightning deals, to be a best seller, so naturally it is getting more expensive.

“Amazon is becoming a pay-to-play platform. It’s not enough for brands and vendors to sell on Amazon. If you want to sell, you need to show up on top of the sort order [in product search results] and the only way to do that is beat the algorithm or pay for a sponsored product ad.”

Roshan Varma, director in the retail practice at consultancy AlixPartners

It’s not enough to make a website. Just like it’s not enough to make a product. There are more websites being created every day than the number of visitors grows on Google search. Thus the importance of advertising, and as a result advertising price, is ever-increasing. There are more products and brands being launched every day than the number of customers grows on Amazon. Hence advertising on Amazon is no longer an option, but a requirement.

It used to be that both Amazon and Google had no ads. Instead they relied fully on algorithms to rank relevant search results. But as those platforms grew they found themselves in a position allowing them to generate billions in advertising revenue and also enable advertisers to out-rank organic search results. In most cases it’s a win-win.

“About 70 percent of the word searches done on Amazon’s search browser are for generic goods. That means consumers are typing in “men’s underwear” or “running shoes” rather than asking, specifically, for Hanes or Nike.”

Julie Creswell, The New York Times

These search platforms are still, hopefully, fair. But the amount of competition means that winning is no longer based on merit alone. On both Google and Amazon people search by generic terms most of the time. This statistic combined with the sea of alternative options means surfacing to the top is challenging. Most great things do surface, like well trusted websites and top ranked products. But kickstarting that growth is today down to advertising.

This is not limited to Amazon and Google though. Many direct-to-consumer brands built on acquiring customers through Facebook and Instagram ads are also finding that customer acquisition costs are skyrocketing as more brands to the same. Daniel Gulati, a partner at Comcast Ventures, has a phrase for this phenomenon: “Customer acquisition cost (CAC) is the new rent.” Well, paying Amazon is the new rent too.

In the end this is all about supply and demand. Both Amazon and Google have most of the marketshare in terms of demand, one is the leader in search while the other leads shopping. This means everyone on the supply side gets to fight for it. The more of them want to get in front of Amazon and Google visitors, the more more expensive it gets, both in advertising fees and the work required to be better than competition.

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Juozas "Joe" Kaziukėnas

Founder of Marketplace Pulse, Joe wears multiple hats in the management of Marketplace Pulse, including writing most of the articles. Based in New York City. Advisor to other startups and entrepreneurs. Occasional speaker at conferences.

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