Amazon and Online Ads – What is the Value?

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Article: What’s the real value of online ads? Maybe not much

An article calling into question the value of google ads or online ads in general.

The Lawyer:

An article that starts with “a group of economists” should instantly be mistrusted. Unless it’s “a group of economists/lawyers walk into a bar” then it could be a hilarious joke 😛

I think that (and correct me if they addressed this already) the increase in mindshare is a valid indirect influence for the established brands. Yes, people might already know about Amazon or eBay, but the mere presence of the ads at critical times (e.g. when people are searching with the intent to buy) maintains that mindshare.

Also, of course it is for people that are new – the ones that are not new are likely going direct to amazon or eBay.

Also eBay is probably not the best example because of the variability in price / quality / availability – people may still use the internal search engine to get the best price even where they do land on an eBay page from a Google Ad. (With more traditional retailers, you know the price you see on that page is the best price on the site for that product)

Finally, there may be network effects involved – where Amazon wants to make sure it has a listing on the page due to the fact that its competitor does already. In that case it could be due to a fear that mindshare will decrease and a competitor’s mindshare where Amazon remains absent from that advertising channel.

*every hypothesis untested

The Economist

G the lawyer refutes the claims made by the economists

Hence why economists should not be ad men. They don’t understand how people think. To them it’s a cost benefit thing but they forgot to include things like as you say mindshare and network effects and competitor behavior.

Their study set was quite narrow and didn’t take into account those benefits which may not be reflected in the price

Interesting things that would be worth exploring further:

  • The marginal rate of return per dollar spend on ads for eBay. Yes, marketing seems like a waste of time because of diminishing returns. If you are virtually unknown then the initial spend will most likely be the most profitable, with the marginal return diminishing as spend increased. What is the marginal rate of return for Ebay? At what point should it stop spending money on advertising?
  • Does competitiveness of the industry affect these returns? For a giant like eBay, the impact of fewer ads probably won’t affect their market share – but that is not true for other industries, how does the impact differ across more competitive industry where players are actively fighting to maintain a presence and retain market share – for example Apple and Samsung. I am sure the substitutability of products/offerings play greatly into the impact online advertising will have, and I am equally sure that large companies in competitive industries no matter how established will continue to spend on online advertising in spite of this article. Brands like Nike, Adidas, Coke, Pepsi etc all spring to mind.
  • Sustainability of a strategy without online ads – Is eBay so confident that there exists no competitors in their current industry that it can forsake the need for online ads? It would be interesting to know the choice preferences that people have when making purchasing decisions (albeit wishful thinking) i.e. would Amazon be a credible competitor to eBay, that is consumers could choose between purchasing the same item either on Amazon or eBay, which today is entirely possible? If this were true, then by pulling its online ads, won’t eBay be conceding market share to Amazon?

Given the above, the verdict seems to be that online ads are a necessary evil. I think the better model to apply here would be the Prisoner’s Dilemma, if you were to forsake your ads, would a competitor come in and play the aggressive advertising hand and thus you are worse off than before?

If eBay were to consider anything, I think it would need a more nuanced approach before it decides to stop its ad spending.

Google 1

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