The Darwin Theory of Amazon Evolution
“It’s not the strongest or most intelligent who will survive,” Charles Darwin once said, “but rather, those who are the most adaptable to change.” The 19th-century naturalist was no doubt talking about evolution, but the notion that adapting is the key to survival resonates particularly well in today’s retail business climate. Customers are going through a major transformation in how they search and shop for products. Rarely a day passed in 2020 without another headline highlighting the surge in e-commerce, accelerated by COVID-19. According to eMarketer, online sales in the U.S. increased an estimated 32.4% last year and will top $765 billion by the end of 2021. By now, most brands are aware that adapting to e-commerce is necessary to remain competitive. Within this overall shift, however, a more specific change is taking place that provides a powerful opportunity for brands to position themselves for unlimited growth potential throughout the 2020s – one that may never come again.
The Natural Selection of Digital Advertising
For the better part of the last 100 years, the primary means by which brands advertised to customers included television, magazines, and newspapers. Those days are officially gone. The Wall Street Journal recently reported that – for the first time in history – more than half of all advertising dollars in the U.S. will be spent on digital platforms. This is due to two primary reasons: 1) technology has become an essential component of our daily lives, and 2) online advertising is often less expensive and more highly targeted.
Even more insightful is where this growth is taking place. For the past ten years, Google and Facebook have dominated online advertising. As you can see in the charts below, Google is the largest digital advertising platform in the U.S., capturing about 38% of all online advertising. Facebook comes in second at about 22%. While both giants are far ahead of Amazon in terms of market share, their growth rate has more or less plateaued. From 2018 to 2019, Facebook’s share held virtually steady while Google’s share decreased. Amazon’s advertising platform, as we will explain in greater detail, is on the rise.
The Dominant Traits of Amazon Advertising
It’s impossible to discuss the true potential of Amazon Advertising without first understanding the platform’s impact on daily commerce. According to Consumer Intelligence Research Partners, 142 million American consumers now have access to a Prime membership account. That’s 43% of the entire U.S. population. More than 200 million shoppers visit Amazon.com each month, spending over $160 billion a year. This kind of volume provides Amazon with a deep understanding of how shoppers engage with products and brands as they discover, browse, and purchase online – in the form of data.
It should be noted that Google and Facebook have vast troves of consumer data as well, which is why their advertising platforms have ruled the digital advertising landscape for the past decade. The key advantage Amazon has over these giants, however, is that it is less dependent on third parties. Both Google and Facebook rely heavily on Apple’s iOS platform to collect data. As Nasdaq recently reported, iOS is set to release an update that will impact the way app developers collect data. Amazon, on the other hand, owns its Fire TV platform and can track customer shopping data from within its own marketplace ecosystem.
Amazon’s data collection processes along with its exponential growth among Prime members and monthly shoppers provide the retail giant with a strong opportunity to take digital advertising market share from Google and Facebook. Thanks to the spike in e-commerce, digital ad revenue for Amazon jumped a whopping 51% in the most recent quarter, according to the Wall Street Journal. Meanwhile, Google’s ad revenue grew by less than 10%.
All this points to a promising future for Amazon. As you can see in the Channel Key chart below, Amazon’s advertising revenue is on a trajectory that virtually mimics Facebook’s catapultic rise nearly a decade ago. “Amazon is permeating its advertising network through every consumer touchpoint across the enterprise,” said Ryan Rollo, Chief Operating Officer for Channel Key. “These new opportunities and ad types are enabling the advertising business to grow at rates faster than Facebook.” In fact, a new report from Cowen – largely circulated across major news outlets – forecasts Amazon to be the leading share gainer of online advertising in 2021 and 2022. Citing the same report, Nasdaq recently released its expectations of the retail giant’s potential with the headline: “Amazon’s Ad Business Will Dominate the 2020s”.
The Key to E-Commerce Survival for Retail Brands
The expected growth in Amazon Advertising over the next few years presents both opportunities and challenges for retail and DTC brands. First, the bad news. As more businesses allocate a greater portion of their advertising budgets to Amazon Advertising, the marketplace will become even more competitive. One can imagine a scenario in which large companies will invest heavily into Amazon Advertising, causing a rise in CPC ads for related products. As Amazon Advertising grows, it will become more challenging – and presumably expensive – for brands to stand out from their competition.
Now for the good news – the above scenario hasn’t happened yet. “A lot of people see the accelerated growth in e-commerce over the past twelve months and think the market has matured,” continued Rollo. “Well, it hasn’t. We are still at the beginning.” In other words, brands that are currently on Amazon and building awareness through the platform’s growing advertising network have a unique advantage over competitors who will inevitably join at some point in the time. For the latter’s sake, sooner is better than later. The longer you wait to establish your brand on Amazon, the more competitive the marketplace will grow. At this point in time, each day is an opportunity to increase your brand awareness on Amazon, which will translate into more conversion power behind your ads in the future when they are shown against those of competitors with less awareness.
Channel Key Takeaway
Today, Amazon is much more than an e-commerce marketplace. It has become the #1 platform where customers discover new brands. Two-thirds of consumers now begin their online shopping search on Amazon. This is precisely why its advertising business is growing exponentially. More brands are realizing that, when used effectively, Amazon Advertising works. Of course, the success of a campaign depends on many factors. Brand awareness is among the most important. According to a study cited recently by Forbes, 75% of shoppers say they are more likely to purchase from a brand that they recognize. As competition on Amazon’s advertising network increases over time, brand awareness will play an even more influential role in campaign conversion rates – and the clock is ticking. Times are changing. Customer shopping behavior is evolving around the ecosystem that Amazon has built and continues to expand. If, as Darwin suggested, survival depends on the ability to adapt, then investing in your brand’s presence on Amazon today is essential to success tomorrow.