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Why We Are Focused on Amazon Advertising

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Last month, Fortune reported that Amazon is rapidly becoming one of the world’s largest ad networks, with over $2 billion USD in advertising revenues in Q2 2018 alone.  Their rapid appearance on the world advertising stage is only one of the reasons that we’ve been putting our sights on Amazon for some time now.  Here are our three main reasons to be all about Amazon:

1. Amazon Has Something for Everyone.

In the past, Amazon advertising has largely been focused on on-site internal advertising on Amazon.com.  Amazon has long been a go-to source for feed-based promoted product advertising. This type of internal Amazon advertising has been great for retailers and manufacturers looking to build Amazon as a channel partner. It is also highly effective as long as you watch the math as Amazon charges both for the advertising as well as their platform fees for each sale. Recently, however, Amazon has matured their offerings with the rollout of Amazon DSP to a wider audience.  I’ll speak more about Amazon DSP below, but one strength compared to other Amazon offerings is that you don’t have to sell on Amazon to use Amazon DSP.  In fact, all kinds of companies selling products, services and more are using Amazon DSP, Amazon’s programmatic solution, to profitably acquire customers from advertising delivered in programmatic exchanges across the Internet.

2. Amazon is Investing in Their Platforms

There is nothing like a few billion in revenue to attract resources, and Amazon is no exception.  Amazon is in the midst of a significant platform consolidation. Amazon’s previously disparate solutions for products, manufacturer solutions, and programmatic, and that encompass display, product, video, and store advertising have been combined into a single-login platform. This makes it far easier to know about potential offerings, to leverage knowledge across offerings, and to track and report on Amazon Advertising as a whole (well, maybe someday) We’re quickly on the road to agencies and advertisers taking full advantage of Amazon as a professionally executed network alongside Google and Facebook. This is still in the very early stages, but with hints that other Amazon platforms like Twitch advertising might follow, we are bullish.  For example, billing solutions are not yet integrated across offerings but we hope that the recent addition of single sign-on is a sign that further integration is to come.

3. Amazon DSP is Unique (as a DMP)

Programmatic is evolving faster than any other segment of Digital Marketing.  We have largely moved from the main trend being web publisher migration to exchanges. While this is mature in display, migration to programmatic it is still in early stages in traditional media like TV. Some of the newer programmatic trends involve access to data through DMP (Data Management Platform) integration in the advertiser DSP (Demand Side Platform). This and the use of AI are on the cutting edge of developments we are seeing in programmatic.  Amazon DSP (formerly Amazon AAP in a long line of product name changes) utilizes Amazon’s massive warehouse of customer demographic, product interest, and shopping data to inform targeting for ads delivered in other exchanges. Unique data for targeting is the currency of the new world of Digital Marketing. And since the abuse of social media data has curtailed targeting options in Facebook, Amazon has the ability to leverage tremendous personal data without violating the privacy protections of their users. We’re bullish on the data Amazon can bring to the table for advertising far outside of products sold on Amazon.com.

 

Amazon is changing the Digital Marketing landscape. Because of this we actively sought partnership as a firm capable of in-house programmatic management of all the Amazon platforms including Amazon DSP. We’ve invested in external and internal tools to bridge gaps in Amazon’s still-evolving reporting and to bring our deep financial optimization to Amazon’s advertising products. We’re excited about these opportunities and fully expect that Amazon advertising will be our biggest single growth network in 2019.

Profit: The Only Marketing Metric that Matters

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I recently wrote about the limitations of one of the most widely-held marketing KPIs: ROAS (Return on Ad Spend). The main limitations with ROAS are that it is a measure of efficiency and not magnitude and that the efficiency it measures is revenue generation, not profit generation.

Yet creating revenues without profit, or efficiency without magnitude is not creating success, and we want KPIs that are tightly aligned with success. In fact, that is the sole purpose of a KPI.

So if ROAS sucks at being an indicator of the magnitude of profit, what KPI does work?

I’m going to go out on a limb here and say all marketing metrics are poorly aligned with business success. Which is why your marketing KPI shouldn’t, in fact, be a marketing KPI at all.

It should be a business KPI.

In fact, it should be a really specific business KPI and that is a form of profit measurement called “Contribution Margin”. Contribution Margin is pretty simple to calculate, it is just Revenue – Variable Costs. In this respect it’s a close relative of a metric we like a lot: Gross Profit (Revenue – Cost of Goods). But the key to a good Contribution Margin calculation is what’s included in the variable costs. For us, the biggest variable cost is Ad Spend. But in actuality, we also add in cost of goods and any other per-unit costs if they exist.

If it sounds complicated, you can probably simplify it. If you want to call it Post-Marketing Gross Profit that works, and in many cases may be close to the same number as Contribution Margin, depending on what other Variable Costs exist. Frankly, we find the hardest part is to get this information from clients, as it’s unusual for Marketing to know these numbers and Finance may need an explanation on why it’s important to share them.

So why is Contribution Margin a good KPI? Well, first, it doesn’t just align with the magnitude of profit, it IS the magnitude of profit. Second, if you’re looking at actual profit, a false read on efficiency can’t cause you to make bad decisions in the name of efficiency (this is called the local optima effect and I’ll post about this in the future). If you use Contribution Margin as a KPI, you actually see the drop in profit. And lastly, it lets you do two very exciting things in growing a business, and those are that the investment in marketing becomes a profit center and not a cost, AND it allows you to have a business metric that transcends channel complexity, but how that works is a topic for another time.