Third-Party Sellers on Amazon: Increasing Sales through Advertisements
Since its inception in 1996, Amazon has transformed the world of shopping. Not only has it changed how consumers shop, but it has also altered the way producers sell and market their products. For example, companies that sell items such as comedic graphic t-shirts, quote box signs, and other random knick-knacks now have the opportunity to market their products to a large scale audience via the Amazon platform. Although Amazon sells some products directly, many items are sold exclusively by third-party sellers. Therefore, in order to create profit, Amazon charges sellers a certain fee. This fee, available on AmazonServices Seller Central website, depends on the quantity of the product, the type of product, and the type of seller (either professional or individual). However, on top of this cost, sellers may be able to somehow skew their product to receive a higher ranking in a search sorted by “featured.”
According to a 2016 report by Business Insider, Amazon seems to feature items that have the highest sales rank. In other words, the more featured items are the products that tend to be at the top of the ranking. However, since Amazon is such a competitive market, sellers are being incentivized to increase their rankings. Business Insider’s study discovered that to do so, sellers are directing more money toward advertising. Although on Amazon a seller cannot spend money to increase their rank for a given search, they are able to bid on advertisements to increase their likelihood of selling their products. This advertisement details are enumerated on Amazon’s Marketing Services website.
Image above: Example of a Headline Ad for Planters Peanuts given the search term “peanut butter”
Amazon offers three types of ads: (1) the headline ad; (2) the sponsored ad; and (3) the product display ad. Similarly to what we discussed in class, all three types of ads are cost-per-click, which means that the seller is charged a certain amount, dependent on their bid, every time a consumer clicks on the ad. Based on my reading of the FAQ page about advertisements, it seems that there are separate additional costs based on the placement of the ad on a given page. For example, a headline ad will appear on the top of a search page, whereas a sponsored ad will appear on either the bottom of a search page (or in other spots that I was unable to determine). More specifically related to the Vickers-Clarke-Grove procedure we discussed in class, Amazon offers a service called Bid+ for sponsored ads. Bid+ operates in order to maximize the probability that a seller will receive the top ranking slot for an advertisement. However, by opting for this service, the seller must be willing to increase the cost-per-click by up to 50% for all eligible ads. Therefore, although in the original VCG procedure the dominant strategy is to bid truthfully, Amazon’s Bid+ services incentivizes sellers to offer an initial bid of less than their true value for the ad slot.
Amazon’s marketing services offer an interesting study in online advertisement bids. Due to the variety of ad types as well as the additional Bid+ service, Amazon creates exceptions to the common VCG generalized second price auction procedure. However, despite the digressions from the traditional auction, the underlying format for ad auctions relies on a cost-per-click second price system. Furthermore, although sellers cannot alter their search result ranking, they can increase advertisement spending in order to increase the likelihood that a consumer will view their product. By increasing consumer views, known in the Amazon realm as “impressions,” consumers hope to increase sales, and therefore increase search ranking.
https://ams.amazon.com/faq#start
https://ams.amazon.com/help/ref=ams_head_help#bidBoost
http://www.businessinsider.com/how-amazon-ranks-products-in-search-results-2016-4