Amazon’s rising advertising costs are causing small businesses to feel the pinch.

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To stay competitive on Amazon’s Marketplace, sellers spend more on advertising.

One of the many things Bernie Thompson has witnessed change in his computer-accessories business is the cost of advertising on Amazon. Plugable, a business that he started in his Bellevue garage, Washington in 2014, started placing ads on Amazon. Plugable paid 14 cents per click for each ad. According to data shared by Plugable with NBC News, every click now costs Plugable $1.60.

This can quickly add up for small businesses to more than $100,000 per year. Thompson stated that he cannot choose but to pay to be able to compete on Amazon.

He said, “Today, if your product isn’t advertised on Amazon, you can have a great product at a low price, but no one will buy it, because it’ll be among thousands of other products that match that search phrase.”

Plugable had invested so heavily in Amazon advertising, Thompson stated that it decided to spin-off a portion of its business into PPC Ninja. This firm helps other companies use Amazon ads effectively.

Thompson stated that the common theme we hear from these brands is the difficulty of getting their products on Amazon. “Buying ads on Amazon’s platform has become the biggest cost of doing business, as Amazon has moved to a pay/to-play model in recent years.”

Amazon is primarily viewed by Americans as a shopping site. Amazon has grown to be a major digital advertising company by charging small businesses to make their products rank high in search results. Amazon revealed this month that it had earned $31.2 million selling ads for 2021. This is approximately $2 billion more than YouTube, and nearly eight times as much as Snap Inc’s total revenue.

Experts agree that Amazon advertising can drive sales for many companies. Some of the more than 500,000 small and medium-sized businesses in the U.S. that sell on Amazon believe that people won’t see their products if they don’t pay for expensive advertisements. The experience of shopping on Amazon is confusing for consumers, who must navigate through an growing number sponsored items.

Stacy Mitchell, co-director at the Institute for Local Self-Reliance (a non-profit advocacy group), stated that many sellers are having difficulty selling on Amazon. Advertising is the fastest-growing part of it.

Amazon spokesperson Patrick Graham stated that advertising is completely optional and sellers can decide whether or not to pay. He admitted that Amazon’s cost-per-click rates have increased over time. He said that this was due to advertising being more profitable for sellers.

He stated that advertising is an essential cost for retailers and that sellers can choose to use services from many companies. We are constantly innovating to ensure that Amazon is the best place for sellers and customers to sell to.

Graham stated that Amazon sellers are “thriving”, and that they have access to a variety of tools and services that can help them find relevant products for their customers.

Trying to get views

Amazon uses an auction model to determine the cost of its marketplace ads. Sellers can bid to appear for search terms such as “cotton T shirt” or “toilet paper.” This is because more businesses are willing to spend large amounts on advertising to reach customers.

Keith Gregory, chief financial officer at Mt. Angel Vitamins, a Colorado-based nutritional supplement company. “We have had to reduce the number of products we brought to market due to the higher ad cost.” Mt. Angel Vitamins began selling on Amazon five years ago after the number of physical stores carrying their products declined.

The Institute for Local Self-Reliance discovered that Amazon sellers are giving more of their earnings each year to purchase ad space. The nonprofit Research estimated that merchants spend an average of 4.6 per cent of their 2021 sales revenue to buy Amazon advertising, compared with 1.1 percent in 2016.

Mitchell stated that Amazon can extract more revenue from sellers and take more of their hard-earned income to its own pockets.

Experts agree that businesses cannot avoid rising costs. Chris McCabe, an ex-Amazon marketplace investigator who runs a consulting company that advises sellers, stated that Amazon’s advertising business is vital to Amazon. “If your ad spend is low, it means that you are essentially punishing yourself because you don’t follow the rules of the Amazon ecosystem.”

Florent Hacq, an ex-Amazon employee and founder of Acwire, stated that if a company doesn’t invest in advertising, competitors could target their brand and pay to be first when customers search for it on Amazon. For example, a recent search for Nike returned an advertisement for Kapsen (another brand that makes running shoes). It was located at the top of page, just above a disclosure that indicated it was sponsored.

Hacq stated that Amazon has made these ad placements so prominent, that brands must allocate a budget to ‘defend their position’ when customers search for their brand name. Third-party sellers must use Amazon ads if they want customers to see their products.

Amazon stated that there are many factors that determine whether or not an advertisement will appear. These include the keywords entered and other factors. A spokesperson for Amazon, Patrick Graham, stated that advertising against brands of other companies is common in the advertising industry.

Experts believe that advertising became more important after Amazon cracked down on illegal selling techniques, such as paying for product reviews. After the Federal Trade Commission started investigating the matter, Amazon removed hundreds Chinese sellers from its platform. The FTC declined comment.

Both Gregory and Thompson said that Amazon’s efforts have eradicated some unsavory behavior. They say that advertising is now the only way for sellers to market their products to customers.

Thompson stated that “Now, the only way to win is to spend Amazon money through advertising. That’s better than cheating.”

Customer impact

Amazon’s vast data troves have helped it build its advertising empire. It knows their location, where they live, and what books they have read. It also knows what TV shows they watch. And what questions they ask Alexa. It also provides direct information about customers’ purchasing habits, unlike other advertising companies like Meta or Google.

A senior Amazon marketing manager wrote in a blog post that “these everyday interactions translate into billions internal insights that can be used to help advertisers.”

Mitchell claims that if Amazon’s selling fees and advertising costs go up, it could lead to higher prices for customers. She says they won’t be able to find better deals on other websites because Amazon punishes sellers who offer significantly lower prices elsewhere.

Amazon spokesmen stressed that sellers can set their own prices within its stores.

Graham stated that sellers are free to set their own prices and that customers will see the lowest priced offers if they choose. However, they can still view all offers for the product, Graham added.

Amazon Prime members pay $139 per year, but there are very few ways to avoid advertisements. Amazon allows customers to disable personalized ads. However, Kindle users will need to pay an additional fee in order to have the ads removed.

Graham stated that Amazon is focused upon showing customers ads it believes will be useful, and that the fact that customers interact with them is proof of that.

However, the Amazon marketplace’s abundance of advertisements can be difficult for some customers to navigate. The Strategic Organizing Center, a coalition made up of labor unions, filed a complaint to the Federal Trade Commission in December. It accused Amazon of misleading customers by failing to clearly differentiate advertisements from organic search results.

The coalition’s researchers conducted an analysis of over 3,000 Amazon searches between August and November 2013. They found that 28% of the results were ads. This was in contrast to organic search results which had prominent borders or shading.

Mitchell stated that it is harder to find the right products for you when browsing online.

Graham, Amazon spokesperson, denied these allegations and stated that the company follows the FTC guidelines.

He said, “We are thrilled by the positive response both from customers and sellers to our advertising services as we continue to work to become their number one retailer destination.”