Small businesses say they are hurt by rising costs to advertise on Amazon

Among the many things Bernie Thompson has seen change since he started his computer-accessories company is the price of advertising on Amazon. Plugable, the business he founded in his garage in Bellevue, Washington, began placing ads on the e-commerce site in 2014. Back then, it paid roughly 14 cents every time someone clicked on an ad. Now, each click costs Plugable an average of $1.60, according to data the company shared with NBC News.

For some small businesses, that can quickly add up to more than $100,000 a year. But Thompson said he has little choice but to pay if he wants to compete on Amazon.

“Today, if you don’t advertise on Amazon, you can have the best product at the best price and no one will buy it because it’ll sit in a stack of thousands of products that match that search term,” he said.

Plugable was investing so much in Amazon advertising that Thompson said it decided to spin off part of its business into PPC Ninja, a firm that helps other companies effectively use ads on Amazon.

“The common thread we hear from those brands is how difficult it is to get their products seen on Amazon,” Thompson said. “As Amazon has shifted to a pay-to-play model over the last few years, buying ads on their platform has become the most important cost of doing business.”

Most Americans think of Amazon primarily as a shopping website. But the company has also grown into a digital advertising behemoth, in part by charging small businesses to ensure that their products appear high in search results. Amazon announced this month that it earned $31.2 billion selling ads in 2021, roughly $2 billion more than YouTube and almost eight times the total revenue of Snap Inc. Its ad business expanded by 32 percent in the fourth quarter, making it one of the company’s fastest-growing revenue streams.

Many companies find that advertising on Amazon helps drive sales, and experts acknowledged it could be more effective in some cases than Google or Meta. But some of the more than 500,000 small and medium businesses in the U.S. who sell on Amazon feel that if they do not pay for expensive ads on it, people will never see their products. Consumers, in turn, need to wade through an increasing number of sponsored items while shopping, an experience some critics have described as misleading.

“Many sellers are struggling to make it because of the high cost of selling on Amazon,” said Stacy Mitchell, co-director of the Institute for Local Self-Reliance, a nonprofit advocacy group. “The fastest growing piece of it is advertising.”

Patrick Graham, an Amazon spokesman, said advertising is entirely optional for sellers and they can choose whether to pay for it. He acknowledged that Amazon has seen cost-per-click rates increase over time. But he said that was because advertising had become more beneficial for sellers.

“Advertising is a standard cost of doing business for any retailer, and sellers choose to use advertising services from a range of companies,” he said in a statement. “​​As we strive to make Amazon the best place for sellers to serve their customers, we are always inventing so that our advertising products help customers discover selection they love and help sellers cost-effectively succeed in our store.”

Graham added that sellers are “thriving” on Amazon, and emphasized that the company provides “a range of free tools and services to help them surface relevant products for customers.”

Vying for views

Amazon determines the price of marketplace ads using an auction model, where sellers can place bids to appear against search terms like “toilet paper” or “cotton T-shirt.” Costs are rising because of greater competition, as more businesses decide they are willing to spend heavily on ads to reach customers.

“Some categories are nearly impossible to launch new products into because of the advertising cost of sales and ranking power of existing brands in those spaces,” said Keith Gregory, the chief financial officer of Mt. Angel Vitamins, a Colorado-based dietary supplement company. “We’ve had to scale back the number of new products we would have brought to market because of the higher ad costs.” Mt. Angel Vitamins decided to start selling on Amazon about five years ago, after seeing the number of physical retail stores carrying its items dwindle.

Year after year, Amazon sellers are giving up more of their earnings to buy ad space, the Institute for Local Self-Reliance found. Research published by the nonprofit in December estimated that merchants spent an average of 4.6 percent of their 2021 sales revenue on Amazon advertising, up from 1.1 percent in 2016.

“It is a way to extract more revenue from sellers, for Amazon to take their hard-earned revenue and put more of it in its own pocket,” Mitchell said.

Experts say that businesses have little choice but to accept the rising costs. “Amazon’s ad business is incredibly important to Amazon,” said Chris McCabe, a former marketplace investigator at Amazon who now runs a consulting firm advising sellers. “If you have low ad spending, that means you’re essentially punishing yourself, because you’re not playing by the right rules within the Amazon ecosystem.”

If a company chooses not to invest in advertising, its competitors may target their brand name and pay to appear first when customers look for it on Amazon, said Florent Hacq, a former Amazon employee and the founder of the e-commerce growth agency Acwire. A recent search for “Nike,” for example, returned an ad for Kapsen, another brand that makes running shoes. It was displayed at the top of the page, above a small disclosure indicating it was “Sponsored.”

“Amazon has made those ad placements so prominent that brands have to allocate a specific budget to ‘defend’ their position when customers look for their own brand name,” said Hacq. “Effectively, Amazon has made using Amazon ads compulsory for third-party sellers if they want their products to be seen and purchased by customers.”

Amazon said that a number of factors determine whether an ad will appear, not just the specific keywords someone enters. Patrick Graham, a spokesman, added that advertising against other companies’ brand names is a common practice in the advertising industry.

Some experts say that advertising began playing a more crucial role after Amazon started cracking down on illicit selling tactics, like paying for positive product reviews. Last year, Amazon kicked hundreds of Chinese sellers off its platform for review abuse, reportedly after the Federal Trade Commission began inquiring about the issue. The FTC declined to comment.

Amazon’s efforts have eliminated some unfair behavior, said both Thompson and Gregory. But, they say, advertising has now become one of the only ways for sellers to get their products in front of customers.

“Now the way to win is to pay Amazon money through advertising, and that’s actually better than cheating,” Thompson said.

Customer impact

Amazon built its advertising empire by leveraging the vast troves of data it collects from customers. It knows where they live, what books they read, which TV shows they watch and what questions they ask Alexa. Unlike other advertising companies such as Google or Meta, it also has direct information about people’s purchasing habits.

In a blog post, a senior marketing manager at Amazon wrote that “these daily interactions translate into billions of internal insights that can help advertisers.”

But Mitchell says that when advertising costs and other Amazon selling fees go up, that could theoretically translate into higher prices for shoppers. They can’t always find better deals on other websites, she says, because Amazon penalizes sellers for offering significantly lower prices elsewhere.

An Amazon spokesman stressed that sellers set their own prices in its store.

“We empower sellers to make their own choices on how they price, and while we feature the offers that meet customer expectations for low prices, customers can still see all offers for the product if they wish to do so,” Graham said.

There are few ways for Amazon customers to escape advertisements, even if they pay $139 for a year for an Amazon Prime membership. Amazon does allow people to turn off personalized advertisements, while Kindle users must pay an additional fee to remove ads.

Graham said that Amazon is focused on showing customers ads that it believes will be helpful, and the fact that customers engage with them demonstrates that is the case.

But the abundance of ads on Amazon’s marketplace may be confusing for some consumers to navigate. In a complaint filed to the Federal Trade Commission in December, the Strategic Organizing Center, a coalition of labor unions, accused Amazon of deceiving customers by not clearly distinguishing advertisements from organic search results.

Researchers from the coalition conducted an analysis from August to November last year of more than 3,000 searches on Amazon, which consisted of popular queries and items from the Consumer Price Index basket of goods, such as “shower curtain.” In the complaint, the researchers said they found that 28 percent of the results were advertisements, the vast majority of which were not clearly distinguished from organic search results using things like shading or prominent borders.

“It’s harder to actually browse for and find products that meet your needs,” Mitchell argued.

Graham, the Amazon spokesperson, denied the allegations and said the company abides by FTC guidelines.

“​​We are excited by the positive response from both customers and sellers to the value our advertising services provide them as we continually work to be their number one retail destination,” he said.