Blog Article
July 8, 2024
This article uses Amazon and Walmart as illustrative examples using BCG analysis. All information is for illustrative purposes only and based on publicly available data.
For all the buzz about commerce media, few industry leaders appreciate a simple fact: advertising has become key to e-commerce growth. Just look at the two US-based giants in the commerce landscape: Amazon and Walmart, each with a robust media arm that contributes significantly to their overall profitability.
Amazon derives as much as 68 percent of its profits from advertising, according to a 2022 BCG analysis. Ads are considered its highest margin and fastest growing segment, reportedly generating $46.9 billion in 2023, or roughly $35 billion in annual profits (assuming a category benchmark of 75 percent margin). That’s more than its haul from the highly-profitable Amazon Web Services (AWS) segment.These substantial profits allow Amazon to reinvest heavily into its website, including lower prices for consumers, expanded distribution, new markets, and product development. The absence of this advertising windfall would likely mean a less dominant Amazon, struggling to maintain its competitive edge and innovation pace.
Similarly, the BCG study found that Walmart generates 12 percent of its profits from Walmart Connect ads, totaling an estimated $3.3 billion annually (based on $27.1 billion reported operating income in 2023). With 10,500 locations globally, its average traditional brick-and-mortar store nets an estimated profit of $2.6 million annually. That means Walmart would need to build 1,270 new locations to match advertising’s annual profits. At a rough capital expenditure of $7.4 million per store (based on FY17 disclosures), the retailer would spend $10.2 billion to realize those profits. Digital advertising delivers the same profit and requires a fraction of the investment, because the online consumer experience already exists and generates efficient margins as high as 70-90 percent (as Walmart’s CFO shared with Reuters).
This stark comparison underscores the strategic importance of commerce media. Even today’s leading online retailers and marketplaces rely on advertising to maintain and enhance profitability, without the enormous capital expenditures (known as capex) associated with physical—or even digital—store expansion.
But growing a commerce business also requires new strategic priorities and ways of working with internal and external partners. Here are a few principles that can guide teams to success.
A successful commerce media platform must navigate the delicate balance between user experience, advertiser needs, and platform profitability. Striking this balance can lead to impressive financial returns, with potential profits reaching 2 percent or more of gross merchandise value (GMV), equating to $20 million in profit for every $1 billion in GMV. Here’s how to balance the three essential needs:
Ensuring that every ad shown is relevant and engaging to users is paramount to commerce success. Ads that resonate personally with users enhance their shopping experience and aid product discovery, turning distracted browsers into engaged and loyal customers. According to Moloco data, increased relevancy can drive up click-through rates (CTRs) sixfold, especially when powered by first-party data. In combination, leveraging real-time machine learning (ML) and advanced targeting technology can achieve best-in-class personalization and relevance, while preventing issues such as ad blindness.
Every channel has to continually earn its place on brands’ latest media plans. Advertisers want clear, measurable results from their investments, which means retailers need to offer tools and data that support their specific goals, whether that’s acquiring new customers, increasing purchases, or driving brand awareness. Demonstrating the tangible value of each campaign fosters trust and encourages advertisers to not only keep spending, but increase their budgets.
Once a commerce media platform is live and ad revenue comes pouring in, retailers should strategically reinvest those profits to grow and strengthen their overall retail business. This can include initiatives such as:
While finding the right advertising technology is key to growing any commerce media business, you also need to develop a holistic organizational commitment, from executive leadership to front-line sales reps. Key considerations include:
Despite the technical and organizational challenges, commerce media is too lucrative for any retailer or online marketplace to ignore— whether that’s optimizing and growing your retail media business, or getting this investment off the ground for the first time. With the potential to drive $20 million in profit for every $1 billion in GMV, the financial rewards can not only boost your bottom line, but also transform your business, as you invest in better prices, distribution, supply chains, and beyond.
This opportunity is not exclusive to Amazon and Walmart. At Moloco, we’ve seen up to 44 percent of partners’ total profits come from their commerce media businesses. The time to start or upgrade your commerce media strategy is now.
LEARN MORE: Top 5 commerce media trends unveiled by industry leaders
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