How Ecommerce Is Bringing Online Advertising Into Supply Chain And Product Decisions

Ecommerce and retail marketers can no longer keep their eyes squarely focused on media metrics like ROAS. Their world has just gotten bigger.

In addition to the media and advertising supply chain, they must consider product development and manufacturing along with shipping and fulfillment.

Amazon provides sellers the metrics ACOS (Advertising as a Cost of Sale) and IPI (Inventory Performance Index), which take into account not just marketing costs but warehousing and fulfillment costs, as well as how expensive a product is to ship. The metrics have made supply chain data an unavoidable metric for ecommerce marketers.

The result is that for many brands and sellers, those supply chains are converging with shared data.

On Amazon, keeping warehouse inventory flowing smoothly and in stock is critical for showing up in lucrative search results – both paid and organic. And for store-based brands, the cost of fulfilling orders is influencing new product development and even merchandising, since grab-and-go staples like candy bars or a six pack of beers are practically impossible to deliver to someone’s door without sacrificing profit.

Advertising data can no longer just be used for advertising; It must inform the product development and fulfillment supply chains. And data-driven marketers are hungry for real-world supply chain data to power their online ad efforts.

The Amazon effect

Amazon is the clearest example of how ecommerce marketing has collapsed many different supply chains into one – the great sales funnel.

Consider the Amazon advertising performance metric ACOS (Advertising as a Cost of Sale). Many advertisers are familiar with ROAS, but the Amazon-specific ACOS shows how, in ecommerce, return on ad spend is only one part of achieving a sale, with other factors like merchandizing, packaging, warehousing and fulfillment all built into one metric.

Look at ad spend alone, and a product might seem to be whizzing off shelves with a very high return on spend. But if you consider what it costs to manufacture, box and ship a particular item, that brand might actually be losing money.

Amazon’s Inventory Performance Index (IPI) is another cross-supply chain metric that combines manufacturing and fulfillment in how a product is scored on Amazon, determining how far up organic search results it will appear.

A mattress company might occupy a lot of square footage in a warehouse, so Amazon limits its capacity, but if the brand is spending heavily on advertising and keeps the product in stock without letting mattresses sit in the warehouse for days, it likely has a high IPI score, and will be rewarded with visibility on Amazon’s shopping site and space in its warehouses.

Amazon has put much more emphasis on its IPI score in the past year, said Brian Burt, CEO of the Amazon advertising agency Canopy. In the early days of the pandemic in 2020, Amazon restricted its warehouse inventory because it was focusing on delivering necessary home cleaning and health care supplies. But Amazon hasn’t relaxed those rules, and the tougher IPI seem to be the new normal, not a temporary pandemic response.

“By reducing inventory allowances and putting a heavier focus on IPI, Amazon is weeding out the sellers that aren’t as experienced with inventory management,” Burt said.

That’s an important change for Amazon. Pay to play has always been the rule on Amazon, so sellers with savvy advertising and keyword targeting tactics had an advantage. Now, Amazon is forcing those sellers to improve their manufacturing and fulfillment supply chains, or they can’t use the advertising supply chain as effectively (which is to say, Amazon will give the ad inventory to brands that have high IPI).

Experienced brands struggle with this transition to ecommerce too.

Companies that sell single items or small packs of common home goods like batteries or toothbrushes aren’t accustomed to one-off sales and deliveries, said Trevor George, CEO of the Amazon agency Blue Wheel Media. Those brands ship pallets of hundreds of items to retailers.

Many traditional CPG brands are even taking a loss on Amazon sales right now, George said, because they don’t want to sacrifice ecommerce market share and scoring strongly on Amazon metrics like IPI, which build long-term strategic advantages, while the company figures out a plan for fulfillment.

Supply chain convergence isn’t just coming from within advertising. Fulfillment-focused companies are expanding into advertising.

The ecommerce media and fulfillment startup Whitebox, which operates ecommerce warehouses and does last-mile delivery, hired former AppNexus CRO Marcus Startzel as CEO two years ago to add an advertising business, seeing the crossover opportunity from the real-world supply chain point of view. The company’s analytics and advertising product, called Omnifi, launched in June, and unites programmatic advertising on Amazon with warehouse data.

Retail and ecommerce converge

Amazon may be the biggest example of how retailers must look at all three supply chains holistically, but real-world retailers are facing the same challenges and coming up with their own solutions.

The French grocery chain Carrefour launched an online ad platform in June. Like Amazon, it goes beyond just incremental revenue or extending shopper marketing deals.

“One element where there’s the most innovation (for the ad platform business) is in how to handle the cost of home delivery and last-mile transportation,” said Elodie Perthuisot, Carrefour Chief eCommerce and Data Officer.

For Carrefour, the ad platform is part of its experimentation with new forms of fulfillment and new cost structures, from curbside pickup to express deliveries. Each fulfillment method comes with different costs for Carrefour, in the form of employees who must collect and bag groceries, or bikers or drivers getting orders to people’s doorsteps.

Carrefour’s analytics service helps brand partners understand what kind of products sell most effectively based on different fulfillment choices, so a brand might see that it does well on large grocery orders for pick-up at store, but doesn’t end up in smaller express delivery bags.

“Improving the cost of each part of the value chain, particularly transportation, but also of packaging and preparation,” is an important part of how the ad platform helps Carrefour negotiate the ecommerce landscape, she said

There’s room to get even more sophisticated: On Amazon, a product that’s cheaper to ship to someone’s home might turn some of those potential delivery savings into a price cut or ad promotion on the product.

GoPuff, a one-hour delivery service for pharmacy and convenience store products, also launched an ad platform last month. What sells effectively in stores – the merchandizing and product placement of impulse buys by the register, for instance – doesn’t necessarily transfer to ecommerce, said VP of marketing solutions Andy Berman.

The GoPuff ad platform, like other retail advertising-and-fulfillment crossovers, shows how cost management structures change with the shift to ecommerce. The six-pack of beer bottles that someone grabs from a convenience store are more easily shipped and stored as cans, for instance.

Or sometimes brands are overreacting to a change, Berman said. Many candy companies suffered because impulse buys were down last year (which is to say, people weren’t reaching their hands into open boxes of candy bars) and because many grocery stores have stopped carrying the traditional large shelves of sweets by the register. But products that seem to be diminishing in-store can sell well on an impulse buying platform like GoPuff.

Having an advertising and analytics service opens up more channels for GoPuff to return value to brands its carries by helping them hone their overall ecommerce practice, he said.

Advertising and ecommerce data is also moving up the corporate pyramid.

It used to be that advertising campaigns were based on advertising data. Optimization was based on digital ad metrics and data pulled from media itself. Now, advertisers pull data from more of the organization so they can understand whether they’re driving profitable business results, as opposed to pure ad metrics ROI (like higher click rates or reach). CEOs and CFOs are interested in online advertising cost structures just like they would have their finger on the pulse of global shipping and product costs.

The Dentsu agency Merkle acquired the ecommerce experiential agency LiveArea earlier this month. It was a rare deal combining the media agency with a consultative retail agency that manages merchandizing and creative strategy.

Merkle’s addition of LiveArea may seem like an awkward add-on because they have a different agency focus and billing structure – as a consultancy, not a media buyer – said Pete Stein, Dentsu’s global lead for experience and ecommerce. But as ecommerce and advertising data moves up the chain, it’s being evaluated alongside cost and profitability data that sits above the traditional CMO.

“We’re seeing [convergence] within the brand organization, and it’s bringing us together with Chief Revenue Officers, Chief Financial Officers and, ultimately, the Chief Executive that’s running the business,” Merkle’s Stein said.

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