September 23, 2022 11:35 AM
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.
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 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.