If you’ve noticed an increase in advertising rates on Amazon, you’re not alone.
New research from Marketplace Pulse indicates that Amazon Advertising rates soared more than 50 percent in May from the previous year to an average of $1.20 per click. What the research also indicates is that the demand for advertising is actually rising faster than the ad inventory on Amazon, in line with reports that Amazon’s advertising growth rate is actually higher than Amazon itself as a whole. And it shouldn’t come as any surprise that the demand is being driven by the pandemic. But will the demand actually affect your sales? And will it result in increased efforts from lawmakers to push Amazon to pay higher tax rates?
A Look at Amazon Advertising By the Numbers
Amazon’s advertising division may have earned $21.5 Billion in 2020 and claimed 10.3 percent of the US digital ad market. But that success also affected ad inventory for Amazon merchants.
According to the Marketplace Pulse research, the average cost per click in 2020 was only $0.80. Yet by the end of Q1 2021, it had risen to $0.90 percent with an average cost of sale of over 30 percent at a conversion rate of 12 - 13 percent—indicating that it now takes eight clicks at an average price of $1.20 to generate a single sale.
That doesn’t demonstrate a low success rate for merchants using Amazon Advertising. But it does mean there’s a much higher demand from larger, more established brands who sought to leverage its strength—in particular as a Prime Day 2021 strategy. As a result, competition is growing and smaller brands can expect to feel a pinch as larger budgets fuel a larger growth rate.
According to recent predictions, US eCommerce sales are expected to exceed $933 Billion in 2021. And there’s a strong chance that much of that will be generated by Amazon. But success can come at its own price.
Amazon and the New Global Tax Deal
Despite increasing demand from both consumers and lawmakers to increase tax rates for Amazon, its profit margin is reportedly only 6.3 percent owing to continued reinvestments. That falls significantly shorter than the 10 percent margin settled on by the landmark G7 Global Tax Deal Agreement, which ensures that multinational corporations pay taxes of at least 15 percent in each country they operate in.
Yet recent reports indicate that negotiations are underway to include Amazon despite their relatively thin profit margin. The agreement is largely up to efforts on behalf of the Organization for Economic Development to encourage mutual agreement from some 140 countries on Amazon’s admittance to the proposed tax rate. And the proposed tax increase could target some of Amazon’s most profitable business segments, including advertising.
Amazon has already indicated they expect to cooperate fully with any final agreement reached by the OECD. They would have to be. Public criticism of Amazon is at an all time high. But is Amazon too big to fail—or are they being unfairly singled out?
How Brands Can Address the Increase in Ad Rates
It’s important to understand that the Global Tax Deal doesn’t just affect Amazon. Both Facebook and Google will also be covered under the plan. And both Facebook and Google are also two of the most successful advertising platforms for any brand.
If Amazon is included under the proposal, there’s a strong chance that both ad rates as well as service agreements will continue to skyrocket. Brands can address the increase by choosing a keyword strategy and actionable marketing plan that’s proven to be effective, working within their budget and bidding less aggressively. To continue selling on Amazon, there’s also a very good chance they may have to increase prices in order to meet service costs.
Uncertainty demands as much caution as it does understanding of competitive factors. While the Global Tax Deal will likely not halt Amazon’s dominance in eCommerce, sellers should be prepared for any changes and adjust their budgets accordingly. Visibility on Amazon will continue to guarantee the success of your business in 2022 and beyond. Just make certain you’re prepared for the reality of that success.
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