September 23, 2022 11:35 AM

Amazon Advertising Flywheel

Amazon Services

Amazon is spending on marketing to increase the number of shoppers, which attracts brands to buy more advertising, recouping most of Amazon’s marketing expenses.

The company spent $4.8 billion on marketing-related  expenses in the first quarter of 2020 but captured $3.9 in revenues from  hosting advertising. That’s 81% of marketing expenses covered by advertising  revenue.

The share of marketing expenses compared to advertising revenue has  been on an accelerated rise since 2015. In 2015, advertising revenue  represented only 32% of marketing expenses. It grew to 41% in 2016, 46% in  2017, 73% in 2018, and 75% in 2019. Amazon reports advertising revenue as  Other Sales. Marketing expenses include costs associated with various  marketing channels, payroll, and related costs for the marketing personnel.

Amazon advertising flywheel

For comparison, Facebook’s advertising revenue represented 626% of  marketing expenses, and Google’s was at 544%. Both spend considerably less on  marketing than Amazon but generate more revenue from hosting advertising. As  Amazon grows in advertising spend, its advertising revenue will surpass  marketing expenses.

Over the past ten years, Amazon has changed its stance towards  advertising. “Advertising is the price you pay for having an unremarkable  product or service,” Jeff Bezos, CEO of Amazon, said in 2009 before it built  the advertising business. However, during the company’s internal all-hands  meeting in November 2018, an employee asked the CEO if he’s had a “change of  heart” on buying ads. “Yes, I changed my mind,” Bezos said, as reported by  CNBC.

In the company of Procter & Gamble, Samsung, L’Oréal, and  Unilever, Amazon is one of the world’s largest advertisers. At the same time,  it ranks third among the largest advertising platforms, behind Facebook and  Google. Since most of the advertising on Amazon is retail-related, it is not  going to dethrone the two leaders anytime soon. However, the scope of its  advertising network is ever-expanding.

Part of its marketing budget is spent on Facebook and Google, buying  traffic from the two and then selling it to brands. Creating an advertising  arbitrage from buying traffic it could hopefully sell for more later. Amazon  is one of the biggest advertising clients for both of those companies.

Amazon advertising revenue

Amazon reported a record $18.9 billion marketing expense for 2019, up  37% from 2018. That represented 6.7% of the company’s total revenue, the  highest percent since it went public. It reported $14.0 billion in  advertising revenue for the same year. A record year too, although its growth  has started to slow.

This model oversimplifies the inherently complicated Amazon’s revenue  and spending flow. Nonetheless, it describes how the company simultaneously  became both a leading advertiser and advertising network. The net result is  that Amazon is near a breaking point where the advertising flywheel will spin  at zero cost to the company. Brands selling on Amazon are funding the next  Super Bowl ad.


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