Online Advertising Costs - Are they Peaking?

[Ecommerce&MailOrderGuy]

Hi All

Anyone else concerned about the 'slice of the pie' being taken by Amazon/Ebay/Google off your ecommerce sales?
We've been going 17 years now and it's been a fast changing economic landscape ever since we started.
Typically we're currently paying something like 21% advertising commission on gross sales (26% on sales ex VAT).
The cost is similar across all channels.
Have found Amazon & Ebay getting particularly expensive as selling prices are generally lower than can be achieved elsewhere - and repeat purchasing from new customers sourced by these channels poor.
Free delivery has almost been a pre-requisite this year as competition has intensified (previous years we charged a minimum £4.99 P&P per order).
We adopt other methods of marketing too such as: wholesale channel/printed catalogue/SEO etc etc.

What with product margins dropping due to increased ocean freight costs and now a collapse in sterling it feels like all retailers (online and off) are facing a 'perfect storm'.
It feels like a fight-to-the-death out there in the UK market.
- Consumer demand is down (25% down in our market vs '21)
- Distressed competitors reducing prices in an inflationary market just to ebb out some cashflow.
- Rises in staff wage costs, energy, rent, transport.....

I appreciate that this won't be the same for all market sectors.
For instance I believe big sectors such as 'clothing' and 'travel' have had a great year (so far).

But back to my original point.
FANG profits have to grow if they are to hit ever-demanding performance targets.
But it feels like they are now trying to suck out an almost indecent amount of margin out of a very shallow pie.

Any thoughts?

 

[SillyBill]

Your summary is correct and therefore I can't see your below listed items changing in the next 12-18 months, infact I expect the challenges to increase.

- Consumer demand is down (25% down in our market vs '21)
- Distressed competitors reducing prices in an inflationary market just to ebb out some cashflow.
- Rises in staff wage costs, energy, rent, transport.....

As for the FANGs, no signs their current monopolisation is threatened. As per the old stock market saying: the market can remain irrational longer than you can remain solvent...in this case, by the time the FANGs have bled you dry while you being convinced it just has to change, along comes another sucker to give his life savings to him. Rinse and repeat until literally noone left to mug. As bad as it is, I think they still have some room to go. Too many business owners would rather be making NMW with all the aggro/stress than pack it in and go to work for someone else for the same money, and these types are sadly the ones you're competing against a lot of the time.

 

[Ecommerce&MailOrderGuy]

Thanks Bill

To be fair I went into this business with my eyes wide open. We used to get something like £3 of sales for every £1 spent with old-fashioned classified magazines. This was back in the early 2000s well before the internet took over. I therefore pretty much expected digital advertising to return a similar ROI at some stage.

Guess I've enjoyed the days of getting £10/£1 spent from Google and the like.
Fortunately the business I'm left with is pretty robust - and the 'expensive' printed catalogues we mail out don't look so expensive anymore.

The next stage of development will be when Amazon sources the majority of its lines direct from the far eastern manufacturer. I know it already dabbles in this but you'd think it will accelerate in the years ahead?

Good luck any fellow ecommerce sellers out there.
Would love to hear if how margins are changing for any other businesses (especially in the £5m to £10m turnover bracket like us)

 

[SeanOF]

I think the OP here makes an excellent point.

I've recently been looking at our numbers and noting that our turnover is up but our profit isn't due to all the extra costs of driving traffic and then paying fees (e.g. Amazon). Somewhere in my mind a thought was forming that we should probably dispense with all the traffic driving and commissions, halve turnover and we'd probably only see profits down by 10-20%. But the aggro and hassle would fall by more than 50% and so would the risk associated with getting PPC etc right.

I guess this nascent thought is what the OP has articulated. Very interesting.

(these thoughts are from a business much smaller than yours though)

 

[Ecommerce&MailOrderGuy]

Thanks Sean
I'd like to think we have our 'ducks in a row' but it's always dangerous to be complacent.
We have got through another season profitably and I'm not sure all of our competitors will be able to say the same thing. It would certainly make my life easier if we lost a few suicide discounters out of the market.

I know what you mean about holding back advertising spend but I tend to feel that we'd still have all of our fixed costs to pay and at least we can cover runaway advertising costs more than our competition. Such high costs are dangerous though.....until your competition falters you never really know how strong they are.

Aside from personal business its the wider business world that always fascinates me.
I don't think Amazon's proliferation in the UK is particularly positive.
They are simply sucking up sales that would have gone elsewhere and have a questionable approach to UK taxes. They are a very powerful foreign business that now owns large swathes of infrastructure in the UK.
No doubt even Amazon are suffering declining sales at the moment (they have cancelled many new DC's that were planned in USA).
Will this business monster be even more dangerous when it struggles to hit its growth forecasts????

America basically owns the internet now and charge the rest of the world rent.
Nice position for them to be in.

 

[Ecommerce&MailOrderGuy]

Giving this thread a hoof (sorry)
Would love to hear what other ecommerce businesses are experiencing regarding online advertising costs?
Especially anyone using Amazon and Ebay?
These variable costs appear to me to be unsustainable while margins are being squeezed.
Throw in a cost-of-living crisis then surely the warning lights are flashing RED for ecommerce?

 

[Mister B]

We've been going for around 14 years, and having been courted by Amazon within the first 24 months, sadly neglected our own site-Amazon just made it too easy for us.

In the early days, it was like walking along picking £ notes up, but the past four/five years have seen not only the competition increase, but also an inordinate increase in fees from Amazon. As an example, we used to pay a fulfilment fee to Amazon and each additional products added to the basket was charged to us at a nominal rate. We now pay the full whack on all items in the basket. Factor in an increase in storage fees, fulfilment fees, advertising fees, lost stock cost, Amazon ineptitude and the collapse of both Sterling and retail prices, and it leaves us questioning the way forward. I actually said to a business associate two years ago, that within five years we would not be selling on Amazon. More than ever I stand by that statement. (Maybe a little longer than five years though.)

We're now actively driving our own site again and the early signs are encouraging. I know that it's going to be a long, hard struggle, but we would much rather plough our own furrow than either be a slave to the Amazon machine or go back to gainful employment.

What interests me is where the Amazon juggernaut is going to go...as a consumer, I find the site hard to find what I'm looking for, and what I do find is invariably imported tat. As a household we now look at other online retailers to the extent that Prime has been ditched. We have friends that feel the same and I know of many other businesses who are also tired of being treated with contempt by Amazon. If these other businesses move away from Amazon too, then the quality of the Amazon offering will be further diluted, so exacerbating the situation.

As you say, we're in for a fun filled few years, it will be interesting to see if Amazon do start to go backwards. I'm sure that others would disagree, but let's wait and see.

 

[Ecommerce&MailOrderGuy]

Fascinating Stuff Mr B!
Sounds like you have gone down the FBA route?
We started at a similar time to you (2005) and fortunately went down the route of developing our own website as our priority sales channel.
We have always used Ebay/Amazon as selling channels (25% of turnover a couple of years ago, now down to 10%).
On Amazon we have always fulfilled orders from our own warehouses (means we can put our printed catalogue in with orders - naughty naughty ?).

We monitor customer lifetime value and always found Amazon sourced customers to have poor propensity to repeat purchase (Ebay even worse ). At the end of the day most customers from these channels only maintain a relationship with the channel not the seller.

As the highest volume sellers used to go to the top of Ebay/Amazon we used to work our nuts off to maintain top position. But now of course you generally need to pay 15% plus commission on top of fees to get to the top. Even longer ago we could charge a healthy amount for P&P too.

Now we might make a £5k contribution to direct overheads from every £100k gross sales. Ridiculous.

I suppose at least FBA sellers have less warehouse/storage issues?
We ran out stock in 2020 then couldn't get hold of stock in 2021, now in 2022 we are overstocked.
I was desperately looking for additional storage this time last year but thank goodness I couldn't find anything - consumer demand has collapsed 40% in our market this year.

The thing is Amazon can't be allowed to fail. It has increased sales targets it needs to hit to keep its share price riding high. If sales falter I'm guessing they will increase the amounts of stock they purchase direct from far east manufacturers. This will obviously have negative implications for Amazon 3rd party sellers but I don't think they will lose any sleep over this.

 

[Ecommerce&MailOrderGuy]

Amazon share price drops 15% after missing earnings target.
Blimey, they are taking 36% of my net sales as their cut and they still struggle????

Watch out - a wounded beast is more deadly.

 

[AlanJ1]

Hey,

We are a fairly large (especially for our sector) e-com business on our own site and eBay. Things are tough and will continue to be. Consumer spending is down, people are just generally trying to look after money because of the increased costs elsewhere.

A note on Amazon sourcing from the far-east. Unless your product is flying (and I mean top top of it's category) they most likely won't from conversations I have had in the last 12 months. Most of the products you see branded as Amazon's brand aren't there product and they are basically licencing the products from local suppliers (large requirements to go through what they wan't). They even allow you to sell your product and there product.

Not sure what they will do with missing targets, I believe this may be the first (or the first it was a significant miss).

 

[MarkOnline]

We are a low 7 figure ecommerce business. We used to sell on the marketplaces mentioned above but I saw the way the market was moving, we were previously a discount lead sales company who happened to manufacture the products we sold. We never used to advertise (5+ years ago) our price points gave us the exposure to drive sales
5 years ago we decided to reposition ourselves and move away from the discount price point lead sector of the market. I mention this because it gave us exceptionally good margins on marketplaces were buyers were prepared to pay more for our goods. We advertise for various reasons, not all directly sales driven. We achieve between x3-x8 our ad spend. We only advertise a select few of our products and the ad spend as a percentage of gross sales works out at around x20. This season we have reduced our ad spend and have been slightly more aggressive with our price points (advertising rates are getting higher as other sellers scramble to try and pick up sales and exposure.) We still have a core range of niche premium products manufactured in house which we very rarely discount.
It is going to get much tougher before it gets any easier, IMO its expenses which will kill many businesses more than margins, their volumes are dropping and the cost per click has risen. We have a premium value range which retails at £7 when we advertise it our advertising cost per sale works out at £3.50 (last 6 days- was previously £2.25ish (9weeks ago) If the product cost us nothing and we could post it for free the numbers on a per case basis arent viable.

 

[HFE Signs]

I remember the days when you could get your most generic search terms for 5p per click on Google! Where now you can be as much as £3 per click. Just when you think it can’t get any higher, someone else joins the game and up it goes again. People will fall by the wayside and fall foul to a badly managed campaign but then someone new pops up again. I find the best practice it to set a daily limit that you can afford and concentrate on building your returning customers.

 

[Fagin2021]

I remember the days when you could get your most generic search terms for 5p per click on Google! Where now you can be as much as £3 per click. Just when you think it can’t get any higher, someone else joins the game and up it goes again. People will fall by the wayside and fall foul to a badly managed campaign but then someone new pops up again. I find the best practice it to set a daily limit that you can afford and concentrate on building your returning customers.

I've just read a Wordstream article about Google Ads - a blog that's sometimes useful. To quote:

"The good news is, Google Ads yields about $2 for every $1 spent. That’s some tasty ROI pie." It's a statistic often quoted by Google themselves.

When are people going to get it into their heads that, for many online retailers, 2 for 1 is not a good return - it's a disaster. If I got £2 revenue for every £1 spent on Google Ads I'd lose money on every sale and soon be out of business!

 

[HFE Signs]

I've just read a Wordstream article about Google Ads - a blog that's sometimes useful. To quote:

"The good news is, Google Ads yields about $2 for every $1 spent. That’s some tasty ROI pie." It's a statistic often quoted by Google themselves.

When are people going to get it into their heads that, for many online retailers, 2 for 1 is not a good return - it's a disaster. If I got £2 revenue for every £1 spent on Google Ads I'd lose money on every sale and soon be out of business!

I doubt may of us would be able to operate at that level. The price of course is driven by bidders, Google are laughing all the way to the bank

 

[Ecommerce&MailOrderGuy]

I think we are about to see a 'reckoning'.
Expenses too high for most small-ish ecommerce firms (under £50m turnover??)
Remember ecommerce has never been through an inflationary period.....or deep recession (2008 saved by zero interest rates, that trick can't be used again).
Many businesses overstocked.
It's just a question of time.......many firms will manage to limp through 2023 selling off stock for cash flow.

I'm expecting to lose a few competitors which will be handy.
But they are probably thinking just the same thing

 

[CEP]

Very interesting thread with some great posts.

On Google Ads; their latest big rip off is the new Exact Match algorithm - which is anything but. In fact, IMO, it breaks all advertising practice rules and the term should be changed as it is now completely misleading.

Google now show your ad where their algorithm decides your keywords have 'the same meaning or same intent as the keyword'. I've had ads shown where NONE of the keywords are in the searches I've paid for. If you, or your agency, aren't checking your search term report on a daily basis you'll be missing a ton of keywords that should be added to your negative list. As long as they aren't in your negative list, you'll be getting money wasting clicks and lower conversion. A 'win win' for Google and a 'lose lose' for you.

To add insult to injury, Google are now showing far less search terms in your search query reports. They justify that on 'protecting a searchers privacy'. Rubbish, it's to protect Google from you adding more negative keywords to your list and preventing the new algorithm earning them more dosh.

Ad advertising agency, which in a sense is what Google Ads is, would NEVER get away with invoicing you for advertising you haven't requested. Yet they do, day after day. And, it will get far worse. Their AI is aimed at taking even more control away from advertisers so that Google, not you, controls where your money is spent. AI will run to the 80/20 rule, but in Google's favour ie., 80% of the benefit will be to Google, and only 20% to the advertiser.

That is, unless you pick and choose the AI options you select and work out ways to maximise your control and minimise Google's. That's what I'm doing.

 

[Fagin2021]

Very interesting thread with some great posts.

On Google Ads; their latest big rip off is the new Exact Match algorithm - which is anything but. In fact, IMO, it breaks all advertising practice rules and the term should be changed as it is now completely misleading.

Google now show your ad where their algorithm decides your keywords have 'the same meaning or same intent as the keyword'. I've had ads shown where NONE of the keywords are in the searches I've paid for. If you, or your agency, aren't checking your search term report on a daily basis you'll be missing a ton of keywords that should be added to your negative list. As long as they aren't in your negative list, you'll be getting money wasting clicks and lower conversion. A 'win win' for Google and a 'lose lose' for you.

To add insult to injury, Google are now showing far less search terms in your search query reports. They justify that on 'protecting a searchers privacy'. Rubbish, it's to protect Google from you adding more negative keywords to your list and preventing the new algorithm earning them more dosh.

Ad advertising agency, which in a sense is what Google Ads is, would NEVER get away with invoicing you for advertising you haven't requested. Yet they do, day after day. And, it will get far worse. Their AI is aimed at taking even more control away from advertisers so that Google, not you, controls where your money is spent. AI will run to the 80/20 rule, but in Google's favour ie., 80% of the benefit will be to Google, and only 20% to the advertiser.

That is, unless you pick and choose the AI options you select and work out ways to maximise your control and minimise Google's. That's what I'm doing.

Exactly my opinion too. You might have noticed that Google are beta testing an option at the campaign level to remove all match types and just go with broad match and automated bidding. Wonder how long it will be before that becomes the default.

 

[CEP]

Exactly my opinion too. You might have noticed that Google are beta testing an option at the campaign level to remove all match types and just go with broad match and automated bidding. Wonder how long it will be before that becomes the default.

Hadn't noticed that. That is an absolute stinker if that is rolled out.

Where is Google's previous addiction to relevance? How can AI differentiate between all of the nuances of a search? How do you set up ads and landing pages to directly address the want, needs, questions, problem or solution the searcher is looking for?

How can all of that help page conversion, leads, sales and profits?

Google are using advertisers money to teach their AI. That's the bottom line.

 

[Ecommerce&MailOrderGuy]

Did anyone out there manage to crack Google Shopping?
I've ran our Adwords text search campaigns in-house for the last 15 years or so.
Search Ads were relatively straightforward to set up as you can specify the exact keyword trigger terms you want your advert to appear under.
We set these up about 15 years ago and they still return good ROI even today.

Google Shopping, as mentioned by an earlier poster, you can't fully control.
I must have spent thousands of man hours adding negative keywords to my listings but still I could never get them to perform as I would like them to.

Fortunately our affiliates picked this one up for us (Redbrain & others) and they now use AI to get effective return I don't feel comfortable losing the control I used to have but hey-ho.

I still run high-click generic terms in-house for GS. Presumably the affiliates don't like to chase these terms as the click volume is too high and the conversions for them too low???? ie, we are close to break-even on these highly competitive terms.

 

[AlanJ1]

Did anyone out there manage to crack Google Shopping?
I've ran our Adwords text search campaigns in-house for the last 15 years or so.
Search Ads were relatively straightforward to set up as you can specify the exact keyword trigger terms you want your advert to appear under.
We set these up about 15 years ago and they still return good ROI even today.

Google Shopping, as mentioned by an earlier poster, you can't fully control.
I must have spent thousands of man hours adding negative keywords to my listings but still I could never get them to perform as I would like them to.

Fortunately our affiliates picked this one up for us (Redbrain & others) and they now use AI to get effective return I don't feel comfortable losing the control I used to have but hey-ho.

I still run high-click generic terms in-house for GS. Presumably the affiliates don't like to chase these terms as the click volume is too high and the conversions for them too low???? ie, we are close to break-even on these highly competitive terms.

We run around an 8 ROAS on Google Shopping campaigns for a large volume of sales.