This Issue's TLDR...

• Amazon advertising has been stealing from advertisers (maybe)
• BOOKMARK THIS: Return rates by category, on Amazon
• ChatGPT prompts for better ad copy

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Earlier this month, Amazon published a 2017 research paper on its advertising auction model...and then...quickly removed it from its Amazon Science page.

Why?

What did Amazon realize after it had published the research paper?

Strap in, folks. We're about to get a bit conspiratorial.

PS: Remember that year, 2017. It will come up again soon.

Brief background on the study...

Amazon's research paper titled "How do Advertisers React to Changes in Ad Auction Pricing?" investigates how advertisers respond to pricing changes in online ad auctions (i.e., price elasticity).

The researchers' key focus was to understand the direct and indirect impacts of pricing changes on advertisers' behavior, using a novel experimental approach called the Clustered Multiple Randomization Design (cMRD).

Definitionally:

• Direct Impact (DI): The immediate effect of pricing changes, such as an increase in cost-per-click (CPC), on revenue.
• Indirect Impact (II): The response of advertisers to pricing changes, such as adjusting bids or budgets. This captures the advertisers' elasticity, i.e., how sensitive they are to price changes.

The paper talks about how the total impact of a pricing change is a combination of these two effects. For instance, if CPC increases by 10%, the direct revenue (to Amazon) might increase by 10%, but if advertisers respond negatively by lowering bids by 5%, the net total impact is 5%.

In this study, Amazon tested the effect of a reduction in the soft reserve price of an ad auction (i.e., lowering the minimum CPC advertisers need to pay).

The hypothesis was that this would directly reduce auction prices (DI) but would prompt advertisers to increase their bids (II), reducing the overall drop in prices.

Got it? Good.

Here's what the study found...

The direct impact of lowering the reserve price was a -10.67% decrease in CPC.

However, advertisers responded by increasing their bids and budget allocation, which led to a +0.51% indirect impact, offsetting part of the decrease.

Overall, the total impact of the price reduction was a net decrease of about -10.16%.

The experiment revealed a small (but statistically significant!) increase in advertiser bids in response to lower prices, illustrating price elasticity.

Here's why I'm donning my tinfoil hat...

In an odd twist, this study is no longer published on the Amazon Science site.

Go ahead. Search for yourself. Here's what you'll find:

My (conspiracy) theory as to WHY it's not public anymore...

The paper repeatedly talks about a "soft reserve price" in Amazon's ad auction.

Let's unpack what that is:

In the context of a second-price auction model like Amazon's, a soft reserve price is a minimum threshold that influences how much advertisers pay.

It's more flexible compared to a "hard" reserve price -- which is a strict minimum amount below which an ad will not be shown, even if an advertiser is the highest bidder -- but, still, a soft reserve price is a floor that ensures Amazon isn't giving away ad placements below market value.

Now, why is this important?

Well, because Amazon's ad auction has long been understood to be a second-price auction.

I haven't been able to find any recent, official Amazon documentation confirming this, but the internet always remembers, and you can find cached language on Google or the Wayback Machine wherein Amazon talks about its ad auction as a second-price auction.

Here's the thing...

In a second-price auction, advertisers bid for ad placements, and the highest bidder wins, but they pay the price of the second-highest bid.

That's been the understanding which has informed Amazon advertiser budgets, bids, and strategies for over a decade.

BUT...

In this paper, Amazon sort of let slip that they run a modified second-price auction[1], with a soft reserve price.

Per above, this ensures that advertisers don't win placements at too low a price.

Now, remember...this paper was from 2017.

Which is around the last time I was able to find any reference on an Amazon site about the ad auction being a second-price auction.

My (conspiracy) theory here, is that Amazon added a soft reserve price to its ad auction in the late 2010s and, for that reason, scrubbed its "official" documentation of any reference to a second-price auction.

What do you all think??

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[1] Amazon's second-price auction is already a "modified" version because, as many of you know, the numerical bids that you make aren't the actual bids that feed into the auction. Amazon adjusts advertiser bids based on several factors, among which are advertiser trust scores, expected CTR, and relevance. This prevents BIG BUDGETED advertisers from flooding the marketplace with irrelevant ads.

You can find a copy of the research paper in the Amazon Private Label Pathway.

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BEST from LinkedIn

Another banger of a post from my buddy Demian Lazurko.

This time, he's compiled Amazon's return rate thresholds, by category.

This is, of course, relevant to Amazon's new FBA Returns Processing Fee.

But also, it's an interesting view into customer behavior across categories.

And certainly better informs any pro forma forecasts that a brand might create for launching a new or existing product on Amazon.

Thanks Demian!

BEST from X

I've said before that Amazon brand owners and sellers are going to need to evolve their skillsets to become Direct Response Marketers, versus simply Performance Advertisers.

And part of direct response marketing is compelling copy.

If you don't yet have that copywriting "muscle", that's OK!

Because...ChatGPT.

This tweet below is a thread, so I'll save you all some back-and-forth scrolling and copy some of the better prompts.

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Sarah 🦕 @SarahLevinger 🚀 Not sure who needs this right now, but here's the 9 go-to ChatGPT prompts I use on the daily to write psychology-based ad copy: 1:24 PM • Oct 31, 2023 55 Retweets 531 Likes Read 30 replies

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You'll hear people with passing familiarity of ETA talk about "multiples."

But, "multiple" of what?

In lower mid-market deals, the term "multiple" is referring to a multiple of Seller Discretionary Earnings, or SDE.

What exactly is SDE?

Well, it's not a codified accounting concept.

You definitely won't find it in Accounting 101 textbooks or on CPA exams.

It's sort of...an invested concept.

It's an estimation of the cash flow that a business would generate, under new ownership.

And because it's an estimation, there are various judgements that are made to arrive at an SDE number. Some, more common than others.

For that reason, I often tell clients that, in any deal setting, there are 3 numbers, all of which can be true at the same time.

1. EBITDA
2. Seller's calculation of SDE (which is usually prepared by the Broker)
3. Buyer's calculation of SDE

Often, the Seller's calculation of SDE is higher than the Buyer's.

This makes sense, right?

The Seller wants to fetch the highest possible price, and if the price is a multiple of SDE, you go to market with a high SDE.

But, what if, you as a Buyer come up with an SDE calculation that is higher than the Seller's? Perhaps because you see something that they, or their Broker, didn't?

Well, first of all, DO NOT disclose your SDE number.

Second, you might have an opportunity to buy a business "below your basis," which, if you remember, is one of the four ways to win in an ETA acquisition.

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Bruce Marks, MBA, CM&AA @sbabmarks War Story Saturday (WSS): Bruce, I want to buy this business. I’m willing to pay a 3.5X Multiple. ⚠️ Is that on SDE or EBITDA? You know there’s a BIG Difference right? Especially if the Seller’s “Other Benefits" are large. Really! Can you tell me more: 6:47 AM • Apr 22, 2023 18 Retweets 127 Likes Read 13 replies

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