Is Amazon on the Brink of a Big Change for Advertisers?

Something strange has been happening recently with Brand Posts on Amazon.com. In case you’re unfamiliar with them, Brand Posts are Instagram-like entries that companies can add to their pages. They can be about anything — from promotion to simply a quick hello. Historically, these posts have been something of an afterthought for brands, often getting buried, much like brand posts on social networks. But lately, they’ve been showing up in prominent locations on product pages and even on competitor pages. So what’s going on? Amazon, of course, isn't saying, and this leaves the field open to educated speculation.

Here’s our educated opinion: Amazon is incentivizing organic forms of promotion, meaning types of content that are free to post. This reverses a long-time trend towards pay-to-play advertising and is a response to the steady increase of cost-per-click (CPC) pricing, which has been on an upward trend for years. While nothing is certain, this could be a sign that the relentless march towards ever-higher advertising costs may finally be forced to level off.

According to Marketplace Pulse, last year alone, advertising costs on average rose to $1.20 per click, which represented a 50 percent year-over-year increase. In some categories, our advertising team is seeing CPC costs rise above the cost of products. In one category of nutraceuticals, for example, the CPC recently spiked to $25.93, while the top-selling product in the category cost only $23.99.

Advertising cost of sale (ACoS), which measures the costs to advertise on average against net sales, provides even more granular insight into the problem. ACoS has risen from 22 percent over the last year to roughly 30 percent today. In other words, advertising is costing almost one-third of the revenue realized from a product sale. Doing business on Amazon has quickly become expensive, maybe too expensive for some brands to justify.

High ACoS's may be unpleasant for brands, but they're nothing new. Subscription services, for example, often have customer acquisition costs that greatly exceed any particular sale. But in the context of Amazon, the rising cost of advertising doesn’t carry its weight in terms of customer lifetime value. Few, if any, chief marketing officers are going to be comfortable draining their budgets on one-to-one Amazon transactions, no matter how valuable the marketplace may be.

The challenge is especially difficult for marginal brands that lack the data to determine and justify long-term value. If you’re a mom-and-pop seller on Amazon, it’s very hard to sustain a business under that kind of pressure. Such companies may end up migrating to other marketplaces, which is a valid option these days because the choices aren’t as slim as they used to be.

This is what makes the recent changes around Brand Posts so intriguing. While not exactly a new feature on the platform, it’s traditionally been relegated to corners of low visibility. Seeing them on competitor search results pages and in organic search results represents a change. Brands can now use them to drive traffic free of charge, which could alleviate some of the pressure on their advertising sales.

Don’t get me wrong, brands aren’t going to post their way to profit, and Amazon is still a pay-to-play platform. Nonetheless, as the cost for advertising rises above sales, something has to give, and perhaps the new promotion of organic posts is telling us that Amazon may be recognizing the problem.

The broader implications of this are murky at best, but the path forward for brands remains the same. It’s still best to maintain a solid foundation for your brand and its products on Amazon. This means making sure you have your product page as full-featured as possible and that you're making the right investments in advertising to ensure a healthy flow of traffic to your pages. That said, whenever you have an opportunity to organically and freely promote your brand, you should take it. It’s a good idea to leap on brand posts for 2022 at least and see how it goes.

It may be that 2021 will mark the last year that unit costs for advertising rise on Amazon. That’s perhaps a hopeful statement, but brands cannot continue to advertise on Amazon if they don’t realize some profit from it, either short-term or long-term. If Amazon still aspires to be the endless shelf where anyone can build a business, it may need to give a little, and we may be seeing the beginnings of that right now.

Justin Marshall is the chief growth officer of Netrush, an e-commerce accelerator focused on driving growth for brands on digital marketplaces like Amazon and Walmart.