How Auction-powered Sponsored Listings Grew into a Pillar of Profitability for Amazon

Michael Ostrovsky, Co-Founder and Chief Scientist

June 8, 2022
5 min read
Sponsored Listings
Industry Insights

Sponsored Listings provide high relevance

The key feature special to Sponsored Listings is that they are directly relevant to what a user is doing or looking for right at the moment when they see the listing. When a user is searching for new shoes on an e-commerce site, she will see Sponsored Listings for shoes. When a user is searching for a hotel in Hawaii, he will see Sponsored Listings for hotels in Hawaii. This high relevance is the core feature of Sponsored Listings and is the foundation for the positive experience with Sponsored Listings for the platform, its vendors, and its customers.

By contrast, other types of Internet advertising try to guess what a user might be interested in, and these guesses are usually unsuccessful. The result is cluttered web pages and apps, frustrated users tired of irrelevant and distracting ads, and slow websites that try to collect data from all over the internet.

None of these issues apply to Sponsored Listings.

The benefits they give to your platform

An immediate and direct benefit to the e-commerce platform or marketplace running Sponsored Listings is increased revenues and profits. Precisely because Sponsored Listings show highly relevant products to users looking for them right at the time they are searching for them, their effectiveness is very high. That translates to a high willingness of vendors and brands to pay to promote their listings to prominent positions on users’ lists of results.

The high performance of Sponsored Listings makes them a powerful and flexible monetization lever. This lever can be used strategically by the retailer or marketplace to lower its prices or commissions, either uniformly across the platform or selectively in strategically important areas to attract additional brands/vendors/suppliers.

This lever can also create a strategic competitive advantage. A platform with Sponsored Listings can offer a better value proposition for brands and vendors than its competitors who do not have Sponsored Listings. If you derive meaningful revenue from Sponsored Listings, and your competitor does not, you can lower your commissions or prices and eat into their market share while remaining profitable. And if they have Sponsored Listings and you do not, that puts your marketplace at a strategic disadvantage.

Another important benefit of Sponsored Listings is that they generate additional revenue and profit without cannibalizing sales. When a user clicks on a Sponsored Listing, they remain on your website and continue their journey there whether they buy the item or not. By contrast, other types of ads take users away from your website—and they may never come back!

The benefits they give to your customers

Finally, a well-designed Sponsored Listings platform is beneficial for the customers. Crucially, Sponsored Listings are fundamentally different from other types of ads—by design, they are relevant to the customers and to the customer’s current activity. They are not distracting. The quality of sponsored results is high because brands and vendors are putting money behind their message—if their products are not relevant or not good, their investment in the sponsored promotion will not pay off.

In fact, research shows that on Sponsored Listings platforms, customers are more likely to click on results labeled as “Sponsored.” The label gets their attention and conveys a valuable signal that the seller is willing to put extra sponsorship money behind their product.

Finally, the benefits to the platform and the vendors carry over to the customers in the form of lower prices and commissions, wider product variety, and better product discovery.

Here's an illustration: Amazon's sponsored products

The idea behind Sponsored Listings may appear simple and natural, but it took many years of trial and error by many companies to zero in on it from among many other possible forms of advertising, perfect it, and realize its full potential. The perfect illustration of this process is the evolution of advertising on Amazon.

Amazon understood the value of their digital “real estate” very early, and in 2003, established a subsidiary, A9, focused on search and advertising. In 2006, they released their first advertising platform, Clickriver.

The idea behind Clickriver was to allow third-party providers to advertise their products that are complementary to what a user was searching for. So, for instance, a user searching for luggage might see an ad for a hotel chain, or a user searching for a television set might see an ad for a TV installer. Unfortunately, while such items are somewhat related to the user’s direct intent, they were not really what most users were looking for. Moreover, after a click, a user was taken off Amazon’s website, thus cannibalizing Amazon’s own sales. After four years of trial and error, the Clickriver program was discontinued.

Amazon regrouped, and in 2012, took the wraps off its new ad initiatives, as the newly created Amazon Media Group. They explained the strategic importance of the initiative: “If we think about Amazon in two worlds, one world is an Amazon with ads and lower prices. Another world is an Amazon with no ads and higher prices. Which one would we choose? I think nine times out of 10, or 10 times out of 10, we would take Amazon with ads and lower prices.”

Another period of experimentation followed, with various ad offerings eventually assembled under the Amazon Advertising umbrella, with Sponsored Products as the cornerstone. Exponential growth followed, often dramatically exceeding expectations. E.g., in 2018, analysts expected Amazon to make $2.8B from ads. Instead, it made around $10B. By 2020, Amazon was making more than $20B per year from advertising, with Sponsored Products being the key contributor.

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