Who Benefits from Retail Media?

In the world of Retail Media (RM), you'll find tales of remarkable success alongside stories of utter disappointment. Retail giants like Amazon, Walmart, and Chewy have experienced significant profits from their RM programs, with double-digit percentages of their retail revenues coming from these ventures. Some mid-size and small retailers have also seen promising growth in RM-based revenue. However, there are those who dabbled in RM have not experienced the return on investment they hoped for.

So, what factors contribute to the success of an RM program? We believe the most crucial element is a clear understanding of the benefits that RM offers to all parties involved - the retailer, vendors, and customers. Keep in mind that these benefits may be perceived differently (or not at all) by vendors and customers. Therefore, effectively managing motivations and expectations, as well as offering diverse participation strategies, is another key aspect of success. Finally, persistence, flexibility, and patience are vital when launching an RM program. Don't be disheartened by a lack of immediate, astounding financial results – this is par for the course in any emerging business! By staying on track and adapting as needed, you'll be well on your way to making your Retail Media program a thriving component of your business.

Now, let's dive into the benefits, starting with those for the retailer. Picture this scenario: as a retailer, you display top-quality and best-selling products whenever customers search for "electric scooters." However, you notice that your electric scooter sales gradually decline. After conducting market research, you discover that customers' expectations have shifted due to continuous technological advances, and they now expect newer models from your current vendors and new vendors with no sales history on your platform.

Naturally, you'll want to introduce these new products to your search pages. With no sales data and a clear understanding of how to map customers' expectations to product features, you decide to try an "epsilon-greedy" strategy. You allocate one spot on your search results page to showcase a new electric scooter, cycling through all the new scooters in your catalog to determine which ones generate the most sales and "promote" them to your “regular” search results spots. Although you eventually see the desired diversity, you feel it's not happening quickly enough, as your sales data trickles in slowly due to only using one spot for experimentation. You're hesitant to reserve more spots, as they would be taken away from well-selling products with no guarantee of sales.

How can you resolve this dilemma? You wish there was a way to share your diversification risks with your vendors. You know they're eager to sell their new scooters and may already be advertising them through Google Ads. These ads link to your product pages, but you believe that an end-to-end shopping experience on your website would be better for customers, vendors, and your retail business (an intriguing topic that deserves its own blog post). So, how can you help your vendors advertise their new scooters?

Fortunately, the solution is well-known to major retailers like Amazon, Walmart, Chewy, and many others: the Sponsored Products program, which forms the foundation of their Retail Media strategies. So, how can Sponsored Products be used effectively in the context of electric scooters? Let's break it down using a simple example.

You start with reserving several spots on the "electric scooters" search results page specifically for sponsored listings. Vendors can then access a dedicated admin interface, select the "electric scooters" search context, choose the scooters from their catalog they want to compete for these spots, and set the amount (bid) they're willing to pay when their scooter is shown in one of these spots and a customer clicks on it. This "pay-per-click" model is the most widely used across various Sponsored Products programs, with alternatives being "pay-per-impression" or "pay-per-conversion." The "pay-per-click" model shares the risk between vendors and retailers – but more on that in a future blog post!

So, when a customer searches for "electric scooters" on your website, how do you determine which scooters to display in those reserved "sponsored" spots? At its core, this process involves three steps.

First, for each scooter with a "pay-per-click" bid, you'll estimate the probability of a click whenever it's displayed (this probability is known as the estimated click-through rate, or eCTR). Retailers employ a wide range of techniques to estimate this probability, from simple rule-based methods to complex ML models that take into account factors like product title, description, image, reviews, and even overall vendor ratings (another fascinating subject for a dedicated blog post!).

Next, you'll calculate the auction quality score for each product by multiplying these probabilities by the corresponding "pay-per-click" bids:

Auction Quality Score = eCTR * Bid

Finally, to determine which products will be displayed in the reserved "sponsored" spots, you'll rank the candidate products based on their Auction Quality Scores. The products with the highest scores will be selected for display. When a click occurs, the vendor is charged not their bid amount, but the adjusted bid amount of the next highest candidate. This is known as a "second-price auction," which may seem somewhat confusing, but there are good reasons behind it. We'll gladly discuss these reasons as well as other auction types and Auction Quality Score formulas in upcoming blog posts!

With this comprehensive understanding, it's easy to see the immense strategic value of Sponsored Products for all marketplace participants. From day one of the program's launch, it offers immediate advantages for the retailer compared to any "free" diversification approach. Vendors also appreciate having a clear and controllable way to kick off sales for their new products, while customers benefit from seeing more diverse options faster than before.

As customers begin clicking on and purchasing promoted products, sales statistics starts to accumulate. This statistics is then used in your organic search rankings, allowing promoted products to secure placements in organic search results. Additionally, other products from the same vendors experience an organic sales uplift as your organic search algorithm takes vendor ratings and sales histories into account. As a result, vendors can reallocate their marketing budgets to promote other products, making the Sponsored Products bidding landscape highly competitive. Vendors then focus on building sales history and raising their bids to stay competitive, leading to bids that gradually converge at the so-called "true values" of clicks.

Vendors now have even more reasons to love your marketplace, as they can kick off sales of new products and build up their brand. You'll also start generating extra revenue (single or double-digit percentages of organic sales revenue) with extremely high margins (90% and up!). Yay!

Your organic sales and Sponsored Products programs now form a powerful symbiotic relationship. Your marketplace becomes more attractive with high vendor retention and a growing new vendor acquisition rate, while buyers enjoy a fantastic mix of established and emerging products. It's a true win-win-win scenario!

Drop us a line and ask for a free consultation to size the Retail Media opportunity for your online store.