In this article, I’ll unpack the massive growth of advertising on Amazon.
Of more importance, I’ll share some tools to help you if your ad performance has deteriorated as more and more advertising dollars flood into the AMS coffers.
If you believe the adage “follow the money,” then all roads lead to Amazon becoming an ads platform, like Google and Facebook. You may already know that, but what you might not know is how to think about your advertising, so you don’t end up with all of your profits going back to advertisers.
Back in 2017, I began writing posts about Amazon’s advertising strategy. Not a strategy to advertise, but how they plan to increase profits through selling advertising.
I would listen in on the earnings calls and look through the numbers.
Analysts probed the management team to learn more about what they planned to do with Ads. The company was the premier site when people searched online to buy a product, yet ads revenue paled compared to Google or Facebook.
Amazon’s tiny ad revenue contributed a large percentage of operating profit than product sales. The only division doing better than ads for profits was Amazon Web Services.
What if they grew advertising to compete with Google and Facebook?
I shared posts on their plan to get to twenty billion dollars of ad revenue in five years.
They did it in two years.
Below you’ll find some charts and tables to help put the magnitude of ad revenues into context.
Let’s begin with a comparison to Facebook. Over the past five years, Facebook has had a compound annual growth rate of 36.8%.
Amazon has had 65.3% over the same period—almost double.
Keep in mind we’re talking about double digit growth on billions of dollars.
I took the ad spend and averaged it over a year to determine an average daily ad spend. The idea is to understand the change in daily ad spend and how your spend compares to the total spend each day.
When it comes to Amazon, there has been a 12x increase in daily ad spend. Facebook’s increase over the same period is 4.79x. If you advertise on Amazon, your dollar is now fighting with twelve times the dollars it did five years ago.
Here is another way to look at this: If you are a six-figure author who spends 30% of your royalties on advertising, you spend around $82 a day.
If that was all spent on Amazon, your daily ad spend is 0.00014% of the ads run that day.
I share this not to say that advertising is dead or shouldn’t be part of your marketing strategy. Instead, I want to help you exercise some caution as to wade into these waters or, if you’re in these waters and now feel you’re just treading water, some ways to get your spending under control.
Measuring the return on total ad spend
If advertising is your most significant investment/expense, then it better have a return. Let’s be clear: there is no return on investment until you return money to you personally.
Simply put, ads ROI isn’t business ROI.
Too often, the message is you must advertise to grow your publishing business, but there is no guidance as to controlling costs. If you scale spend and sales but not profits, the only business that scaled up was the advertiser.
The focus of return on investment is to find the one ad to rule them all. That helps evaluate ads, but it’s Return on total ad spend (ROTAS) determining if your ad strategy is profitable.
To understand if you’re scaling your business through advertising, you need an accurate measurement—a measure that ties ad spend to earnings. This is ROTAS. What is problematic is the fidelity of the measurement given all the noise in an author’s business. I suggest dividing your earnings (salary if you take one + net profit before tax) by your ad expense.
Do this on a month-by-month basis and track your performance. I apply a three-month and six-month average to smooth out month-to-month discrepancies.
Here are some example charts.
The idea is to use this as guard rails for your business. If you’re below a 1:1 return, are you seeing your audience build?
Below are some charts of authors where we used a trailing three and six month average to guide our ad spend optimization.
If you have a backlist, then as readers work through it, ROTAS will lift. If your spend keeps increasing, but you don’t see a flow through to profits, then it’s time to dig into what’s not working.
True scale is elusive
Because you’re fighting the powerful forces of rank gravity and audience bingeing.
Advertising just amplifies the phase of your book.
If you’re launching a new product, your existing audience driving visibility as purchasing behavior creates sales signals for algorithms. Ads boost that audience-driven momentum, but your existing audience does the heavy lifting.
The same goes with an older book; advertising gets you visibility. However, that book lives in a world with younger, prettier debutants presenting to society on a minute-by-minute basis. Another way to think about this is that the growth rate expectations should be different when you launch versus when you’re not launching a book.
If you’re a slow writer doing maintenance advertising, you should have different scale expectations than when you launch.
Remember your daily maintenance spend goes up against two to four thousand new titles launching each day and the ad spend they have been allocated. This will only get worse as more people advertise, and the costs and saturation of ads increase.
The ability for advertising to amplify is getting diluted by the amount of authors advertising. Do you think ad revenues are going to increase or decrease in the next five years?
If you’ve read my book Advantage, you understand that you play in a winner-take-all market fueled by cumulative advantage. Winners keep winning because they can accumulate resources in current rounds (launches) then use them to their advantage in future rounds. Solving for the customer delight problem versus the successful ads problems yields different results. Hell, it’s an entirely different equation.
You need a formula that produces the two resources you need to accumulate to win the publishing game—funds and fans. This is a simplified version of my business focus on investor needs and customer delight.
Having capital to reinvest in your business is a crucial lever in cumulative advantage.
If you don’t produce more funds than you spend, you’ll be out of the game.
The trick is to find the balance between new customer acquisition through advertising and having profits to invest in other parts of the business or pay you as the investor.
Part of advertising is experimentation. You’ll need to spend money to find the ads that work.
After working on multiple author businesses, my observation is that there isn’t enough scrutiny of how much ad spend is wasted.
Too often, we get seduced by the marketing metrics of ad performance and don’t look at a more critical metric of profitability.
The author focuses on top-line growth at the expense of profitability is on a slippery slope.
What do I mean by this?
An author with a top line of $100,000 that only produces a 20% pretax profit has the same resources to invest as an author earning $40,000 with a pretax profit of 50%. Future success isn’t tied to top-line growth but to how much free cash flow is invested for future growth.
There will be a point in the future where the higher-margin author will have more funds to invest for future growth at a lower top-line revenue and gain the advantage.
It’s not about what your top line looks like but the cash you produce and how you use it to create more fans.
Your choice may be that ad spend is the best use of these funds, increasing the percentage of sales going back into ads. That needs to be weighed against sales and fan growth, not clicks or impressions.
Are people buying your book and sticking around?
Inside your ad program, you need to be vigilant in evaluating the percentage of monthly ad spend on ads that are working versus what goes to trial and error.
Ad spend/Royalties collected = cost of ad spend as a percentage of sales
If it’s above 20%, I suggest diving deep into it if you’re not getting the results you want.
Are you scaling or not?
Can you measure that growth?
I measure at the bottom line, not the top.
Next, look at the percentage you spend on experimentation. You can divide the spend on performing ads by total ad spend.
This is important. Vitally important.
You’re told to experiment to find ads that work. Experimentation will always be part of marketing. The question is when to cut bait?
You may be in a vicious cycle where you constantly focus on finding new ads that work. You have a small percentage of “working” ads and a massive pile of waste that you don’t account for in that process.
Measuring your working ads to your total budget will help you to see the waste. Now start reducing your overall ad budget by looking at the waste first and look to allocate that spend directly into your existing fan base.
You need people to consume your content. But not just any people. The right people.
Of the two fans and funds, it is far more essential to accumulate fans because they are your source of funds, and they create momentum in future launches. Fans are the well and funds the water you draw from it.
These can’t just be anybody but the type of fan willing to pay for your work.
You can make your life harder by just trying to get the most readers. This seems like the right thing to do. Get more and build a critical mass. There is some truth to this, but what type of mass are you building?
Is it discount readers?
What is compelling them to your brand?
Is it price or experience?
When you shift your paradigm to focus on funds and fans, you’ll find many of the currently accepted practices counter that goal.