Amazon Searching for New Revenue Streams
By George Anderson
Amazon.com plans to test a program that would place links to products on the retailer’s partner sites, similar to the system employed by Google.
According to Chris Beasly, founder of Website Publisher, Amazon has invited a group of users including himself to participate in a beta test of the program.
“The way they want the beta test to work is to give you a special code for Amazon’s Keywords Recommends banners (the banners that you feed a keyword to and they show related products) and have this special code then show these new ads 50% of the time,” Mr. Beasly wrote on his SitePoint blog.
“On the phone last night it was explained to me that this is more or less an Adsense clone, meaning third party sponsored links, not Amazon links. It is known that Amazon currently get’s sponsored links for their own sites from Google, but apparently they wish to take out the middleman and break out on their own. The fact is that while Amazon has a high gross revenue, they have really thin profit margins, whereas Google and even eBay have much better profit margins. So I think there is probably a little bit of business jealousy at work here, and rightly so. Amazon realizes that if they want to compete as a major Internet destination, not just an ecommerce site, they need to capture a larger chunk of the online advertising revenue.”
Moderator’s Comment: Is Amazon on the right track getting into the contextual advertising business? Does it have to make itself more than just an e-commerce
site to operate more profitably? –
George Anderson – Moderator
Yes, yes, yes, more ads, bring it on. There may be something out there that I would never think of buying if someone didn’t rub my nose in it.
Ultimately every retailer has to be able to drive profitable top-line growth, and one key to this involves adding products or services that are in demand and improve the profit mix.
Following this thinking, Amazon doesn’t necessarily need, in the short term, to enter the advertising business, but it certainly is a strategically sensible move. In some respects, it parallels the convergence taking place in the supermarket business where retailers and manufacturers are striving to develop in-store media that connect effectively with the shoppers. It all makes a lot of sense to me.
Bravo to Amazon. As one of the first to enter the online retail environment, it has been interesting to watch Amazon evolve. They have had to follow many of the traditional retailing strategies to respond to changes in the economic environment. They struggled with “over stored” problems as they cut back numbers and labor costs in their distribution centers. They broadened their product selection to reach more people and include higher gross margin categories. They established “franchisors,” allowing other retailers to piggyback on their IT infrastructure. Now they are pursuing a little “vertical integration” as they offer their own advertising platform in order to capture advertiser revenues directly.
The biggest impact of the internet is the expanded reach it provides for the organization that “has the consumer’s attention.” There is really no reason why Amazon needed to leave the advertising revenue from targeted promoters go to others. This is a smart move for Amazon, but as described in the article it may be that many of the potential users are tied up in contracts that prevent them from jumping on board.
So the Amazon effort does not become a lesson in innovative retailing, but rather a lesson in contract negotiation. It makes it even more important to read the fine print so that you don’t sign yourself into an agreement that removes all other options down the road.
This is an outstanding example of taking the merchandise, virtually anyway, to the customer, rather than expecting the customer to come to you. Just like getting your hot dog and soft drink at your seat in the ballpark! This has gotta work. The only potential for failure is in a screwed up execution.
Via saturation advertising and low-margin pricing, Amazon got big. Now it needs to get truly profitable. Ad distribution has great margins, certainly compared to books, entertainment products or almost any other merchandise. So Amazon’s strategy is good. If the execution is poor at first, they’ll learn from it and get better. They’ve certain proven themselves to be flexible many times in the past.