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Small businesses say they’re hurt by rising Amazon advertising costs

Among the many things Bernie Thompson has seen change since he started his computer accessories company is the price of advertising on Amazon. Plugable, the company he founded out of his garage in Bellevue, Wash., began placing ads on the e-commerce site in 2014. At the time, it paid around 14 cents every time someone clicked on an ad. Now, each click costs Plugable an average of $1.60, according to data the company shared with NBC News.

For some small businesses, that can quickly add up to over $100,000 a year. But Thompson said he had no choice but to pay if he wanted to compete on Amazon.

“Today, if you don’t advertise on Amazon, you can have the best product at the best price and no one will buy it because it will appear in a pile of thousands of products that match that search term,” a- he declared.

Plugable was so invested in Amazon advertising that Thompson said he decided to spin off some of his business to PPC Ninja, a company that helps other businesses use ads on Amazon effectively.

“The common thread we hear from these brands is how difficult it is to get their products seen on Amazon,” Thompson said. “As Amazon has transitioned to a pay-per-play model over the past few years, buying ads on its platform has become the most significant cost of doing business.”

Most Americans view Amazon primarily as a shopping website. But the company has also become a digital advertising giant, in part by charging small businesses to ensure their products appear at the top of search results. Amazon announced this month that it earned $31.2 billion from selling ads in 2021, about $2 billion more than YouTube and almost eight times the total revenue of Snap Inc. Its ad business grew 32% in the fourth quarter, making it one of the fastest in the business. – growth in revenue streams.

Many businesses find that advertising on Amazon helps drive sales, and experts have acknowledged that it could be more effective in some cases than Google or Meta. But some of the more than 500,000 small and medium-sized businesses in the United States that sell on Amazon believe that if they don’t pay for expensive ads, people will never see their products. Consumers, in turn, have to browse an increasing number of sponsored items when shopping, an experience some critics have described as misleading.

“Many sellers struggle to do this because of the high cost of selling on Amazon,” said Stacy Mitchell, co-director of the Institute for Local Self-Reliance, a nonprofit advocacy group. “The fastest growing part is advertising.”

Patrick Graham, an Amazon spokesman, said the ad is completely optional for sellers and they can choose whether to pay for it or not. He acknowledged that Amazon has seen cost-per-click rates increase over time. But he said that was because advertising had become more advantageous for sellers.

“Advertising is a standard cost of doing business for any retailer, and sellers choose to use advertising services from a range of companies,” he said in a statement. “As we strive to make Amazon the best place for sellers to serve their customers, we are always inventing so that our advertising products help customers discover the selection they love and help sellers succeed profitably. in our store.”

Graham added that sellers are “thriving” on Amazon and noted that the company provides “a range of free tools and services to help them bring relevant products to customers.”

Competing for views

Amazon determines the price of Marketplace ads using an auction model, where sellers can place bids to appear on search terms such as “toilet paper” or “cotton T-shirt”. Costs are rising due to increased competition as more businesses decide they are willing to spend a lot on advertisements to reach customers.

“Some categories are nearly impossible to launch new products due to the advertising cost of sales and the ranking power of existing brands in those spaces,” said Keith Gregory, chief financial officer of Mt. Angel Vitamins, a dietary supplement company based in in Colorado. . “We had to reduce the number of new products we would bring to market due to higher advertising costs.” Mt. Angel Vitamins decided to start selling on Amazon about five years ago after seeing the number of brick-and-mortar retail stores carrying its items dwindle.

Year after year, Amazon sellers are giving up more of their revenue to buy ad space, the Institute for Local Self-Reliance has found. A study released by the nonprofit in December estimated that merchants spent an average of 4.6% of their sales revenue in 2021 on Amazon advertising, up from 1.1% in 2016.

“It’s a way to extract more revenue from sellers, for Amazon to take their hard-earned revenue and put more of it in its own pocket,” Mitchell said.

Experts say companies have no choice but to accept rising costs. “Amazon’s advertising business is extremely important to Amazon,” said Chris McCabe, a former market researcher at Amazon who now runs a consulting firm advising sellers. “If you have low ad spend, that means you’re basically punishing yourself for not following the right rules within the Amazon ecosystem.”

If a company chooses not to invest in advertising, competitors can target their brand and pay to appear first when customers search for it on Amazon, said Florent Hacq, former Amazon employee and founder of the growth agency. of Acwire e-commerce. A recent search for “Nike”, for example, returned an ad for Kapsen, another brand that makes running shoes. It was displayed at the top of the page, above a small mention indicating that it was “sponsored”.

“Amazon has made these ad placements so important that brands must allocate a specific budget to ‘defend’ their position when customers search for their own brand name,” Hacq said. “In effect, Amazon has made the use of Amazon ads mandatory for third-party sellers if they want their products to be seen and purchased by customers.”

Amazon said a number of factors determine whether an ad will appear, not just the specific keywords someone enters. Patrick Graham, a spokesperson, added that advertising against other companies’ brands is common practice in the advertising industry.

Some experts say advertising began to play a more crucial role after Amazon began cracking down on illicit sales tactics, like paying for positive product reviews. Last year, Amazon kicked hundreds of Chinese sellers off its platform for review abuse, reportedly after the Federal Trade Commission began investigating the matter. The FTC declined to comment.

Amazon’s efforts eliminated some unfair behavior, Thompson and Gregory said. But, they say, advertising has now become one of the only ways for sellers to present their products to customers.

“Now the way to earn is to pay Amazon money through advertising, and that’s actually better than cheating,” Thompson said.

Customer impact

Amazon has built its ad empire by leveraging the vast amounts of data it collects from customers. It knows where they live, what books they read, what TV shows they watch, and what questions they ask Alexa. Unlike other advertising companies such as Google or Meta, it also has direct insights into people’s shopping habits.

In a blog post, a senior Amazon marketing manager wrote that “those daily interactions translate into billions of internal insights that can help advertisers.”

But Mitchell says when Amazon’s advertising and other selling costs go up, it could theoretically mean higher prices for shoppers. They can’t always find better deals on other websites, she says, because Amazon penalizes sellers who offer significantly lower prices elsewhere.

An Amazon spokesperson pointed out that sellers set their own prices in its store.

“We allow sellers to make their own choices about how they set their prices, and although we present offers that meet customer expectations for low prices, customers can still see all offers for the product if they want it,” Graham said.

There are few ways Amazon customers can escape ads, even if they pay $139 for a year for an Amazon Prime membership. Amazon allows users to opt out of personalized ads, while Kindle users must pay an additional fee to remove ads.

Graham said Amazon is focused on showing customers ads it finds useful, and the fact that customers are interacting with them demonstrates that’s the case.

But the abundance of listings in Amazon’s marketplace can be confusing to some consumers. In a complaint filed with the Federal Trade Commission in December, the Strategic Organizing Center, a coalition of labor unions, accused Amazon of misleading customers by not clearly distinguishing ads from organic search results.

Coalition researchers conducted an analysis from August to November last year of more than 3,000 searches on Amazon, which consisted of popular queries and items from the Consumer Price Index basket of goods , such as “shower curtain”. In the complaint, the researchers said they found that 28% of the results were advertisements, the vast majority of which were not clearly distinguishable from organic search results by using elements such as shading or prominent borders.

“It’s harder to research and find products that meet your needs,” Mitchell explained.

Graham, the Amazon spokesman, denied the allegations and said the company was following FTC guidelines.

“We are thrilled with the positive response from customers and sellers to the value our advertising services bring to them as we continually work to be their number one retail destination,” he said.

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