At a recent Amazon conference, a speaker mentioned that Amazon’s average Cost-per-Click (CPC) for 2020 went up by a whopping 50%. We are not surprised based on our observations and the trend doesn’t seem to be subsiding. CPCs have been rising by more than 10% each quarter since 2020 and rose by another 12% in the 3rd quarter of 2021, according to Profit Whales.
What does this mean? Amazon has established a very competitive ad bidding culture that makes it hard for brands that are not as well funded to compete. In other words, only the big boys can play, or those that see Amazon rankings as a strategic initiative. It also means that for categories with traditionally lower-priced products, such as grocery, this trend is concerning. Maintaining a reasonable Advertising Cost of Sales (ACoS) for non-branded sponsored campaigns has become much more difficult. In addition to large brands having a strategic initiative to always win, one of the other major contributors to this trend are new brands that are highly funded or, that is, backed by venture capitalists. Their strategies are to launch on Amazon without a need to be profitable. Their short-term strategy is to leverage their high rankings on Amazon to build the brand, eventually derive Direct-to-Consumer (DTC) sales and penetrate retail. Their long-term strategy is to reach a sell-through rate where they can maintain profitability while continuing to heavily invest in sponsored activity. This has become more and more the norm in the grocery category. To achieve long-term success, these brands are doing whatever it takes to win top-of-search placement, regardless of the higher CPCs.
The brands’ launch strategy isn’t much different than the feeding frenzy Amazon Brand aggregators have created, such as Thrasio, by gobbling up successful and trending brands on Amazon, thereby driving up the value of successful Amazon brands. This provides a significant incentive for a brand to do whatever it takes to be successful on Amazon with an eye on cashing in. Anyone who sells on Amazon can tell you that being shut down one day and losing everything is a real possibility; hence, selling out before that happens makes sense.
KartSmartr is doing everything possible to combat this trend and started using Amazon’s Attribution tool immediately. If you’re not familiar with Attribution, it allows you to track external traffic and conversion occurring on your Amazon Item pages. It already made sense to drive a portion of your external ad spend to Amazon since you’ll realize a higher conversion rate over DTC, but with Attribution, it made a lot more sense with the ability to track where the traffic comes from, and results “attributed” to that specific marketing channel. Accordingly, a lot of our customers bought into the strategy. KartSmartr works closely with our client’s marketing department to implement these strategies.
More importantly, Amazon has doubled down on encouraging brands to drive their external ad spend to Amazon with a financial incentive program called the Brand Referral Bonus. By leveraging attribution, you can now receive, on average, a 10% credit for sales attributed to external traffic. With such an incentive, combined with Amazon ads cost, it was a no-brainer for many of our clients to shift a more significant percentage of their external ad spend to drive traffic to Amazon. And while they have not pulled back on their Amazon spend, they are not increasing it to counter the higher cost. They are making up the lesser traffic with their external traffic and realizing conversion rates that are 15% higher than DTC with the bonus of receiving a Referral Credit from Amazon. It makes complete sense. Please note that only brands with Brand Registry have access to Attribution and the Brand Referral Bonus tools.
Additionally, our clients can leverage KartSmartr’s media services for OTT or streaming commercials on Amazon Video, Hulu, Roku or any other streaming media company. This is in addition to podcast advertising. I’ll be talking a lot more about streaming commercials and the need for brands to start thinking about a more full-funnel marketing approach and not focus so much on targeted/conversion ads in my next post. I will provide details about how KartSmartr is providing these services.