Amazon’s advertising revenue grew 64% in the fourth quarter of 2020 to $7.952 billion and while this is only a small part of their total sales of $125.6 billion, it is fast becoming a significant contributor to future growth.
To show you just how amazing Amazon’s advertising capabilities are, we will walk you through a typical shopping funnel and a snippet of the Amazon shopping experience.
Awareness: By creating an unrivalled value proposition with its huge selection of products and fast shipping, Amazon has become top of mind when it comes to product search with 49% of US Internet users starting their searches on Amazon.
Interest, Consideration: In 2020, Amazon improved its “deep learning model” to predict consumer needs, improving the relevancy of ads. Through search, browsing, and purchase history, the Amazon platform can show customers relevant and personalised recommendations, guiding them down the funnel.
Intent, Evaluation: Since a customer directly indicates purchasing intent through engagement within the platform, Amazon can easily display tailored ads and facilitate the evaluation process.
Purchase: The final step is easily completed using stored information and one-click checkout. Customers will receive their purchases in a few days or as quickly as one day in many countries around the world. This is enabled by Amazon’s amazing logistics prediction model and infrastructure, which we will delve more into in later updates.
The beauty of Amazon’s advertising engine is that it adds to the user experience rather than disrupt it, and that uses internal data generated from customer intent to predict future intent rather than external data generated from unrelated sources.
In 2020, Amazon facilitated around US$490 billion of gross merchandise value and is on pace to become the largest US-based retailer in 2021 and beyond. This translates to an extensive trove of valuable consumer data that serves to further accelerate Amazon sales volumes and drive future revenue growth and margin expansion. We believe that Amazon’s expanding advertising capabilities contributes substantially to its competitive advantage as it continues to deliver exceptional growth under the structural shift from brick-and-mortar retail to ecommerce.
About the Author
The Education of a Value Investor by Guy Spier
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