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Why Non-Advertising Businesses Are Going Into Ads – AdExchanger

Why Non-Advertising Businesses Are Going Into Ads – AdExchanger
Written by publishing team

One of the most important trends in advertising at the moment is the rapid growth of advertising business done by non-advertising companies.

OG of this category is Amazon. The online retailer has shown that advertisements can be a high-margin addition to the bottom line, maximizing profits without significant upfront investment for any business that contains valuable data and real estate for potential advertisements in an app or site.

It didn’t come as a shock when Instacart, the online grocery delivery platform and Amazon Fresh competitor, launched a self-serve advertising platform last year. Or this year, when Buy Now, Pay Later (BNPL), Klarna and Afterpay, which offer installment payments for e-commerce, began testing in-house ad networks backed by their financials. Uber is also investing heavily in its advertising business, including the recent hiring of Mark Grether from Amazon Advertising.

There’s one more thing each of these companies have in common: They’re unprofitable. Advertising provides a bridge to profitability, as advertising revenue can be earned with relatively few hiring and without acquiring new users.

Here are some of the businesses and categories that have embraced advertising revenue, and how they approach advertising.

Grocery game

Instacart was a fast follower of Amazon in advertising. This isn’t a surprise, given that it works with many of the same retail marketers who offer their promotional budgets online, rather than in-store coupon campaigns and offers. Instacart has also acquired Amazon’s ad technology leader, Seth Dallaire, as a CRO.

Instacart’s financial information isn’t public, but the company lost more than $300 million in 2019, and had its first profitable month last April, when several new customers tried online groceries during quarantine, the information said last year. But even with the unexpected spike in orders, Instacart only made $10 million in profit a month; Since it needed to hire thousands of other delivery workers to meet the demand, this profit figure was not sustainable without further investment.

Instacart has raised more than $2.7 billion from venture capital investors, but it is an extension of the retailer known for its high costs and low profit margins. Products profit margin is often only a few percent. In contrast to the easy scalability of a software platform, Instacart has to hire gig workers to match sales growth. To increase sales, Instacart must either convert new customers or replace more and more store visits. But user acquisition and retention are expensive propositions at the moment.

Instacart isn’t the only delivery service focused on ads. GoPuff, a one-hour delivery service for convenience store merchandise, launched an ad platform this year.

Ads on the go

Uber is a prime example of a company with potentially high advertising revenue, but it also has huge risks.

The Uber app is among a select group of users with semi-public choices for location tracking. The company knows if they dropped someone off at a mall, movie theater, or hotel, for example, which can be a powerful targeting and attribution engine (pardon the word game).

Uber’s advertising activity is currently tight, but it is important. CEO Dara Khosrowshahi said the company is working at a running rate to earn $300 million in advertising revenue this year. That’s real money (BuzzFeed earned $320 million in 2020, according to a pre-IPO filing, for comparison), but it mainly comes from food delivery app Postmates and the launch of Uber Eats, where restaurants pay for placement in apps.

Another advertising offering for Uber comes from the physical banners drivers can place on their cars. And last month, it first started testing display ads in its main taxi-hailing app.

Forrester vice president and director of research, Mike Proulx, said building an advertising business is also risky.

“Unconventional platforms that enable ad networks should not harm the user experience. Apps like Uber and Instacart have a very specific use case in people’s lives that it is best not to interrupt standard advertising.”

Waze, the Google-owned mapping app, has also experimented this year with in-app advertising opportunities that aren’t a flight for users accustomed to an ad-free experience. The Nissan campaign gave users the opportunity to change the in-app vehicle icon to Pathfinder, as well as integrated marketing content if people are driving in certain locations (rugged terrain, scenic drives).

This is one way for Uber. Although with Grether, former COO of Xaxis and CEO of Sizmek, in charge of the advertising business, Uber could plan to expand into automated and data-driven advertising.

“Brands will always chase audiences to wherever they are most receptive to their messages. However, just because a platform has a well-rounded user base and a high level of engagement, it doesn’t mean that its users will welcome a sudden onslaught of ads,” said Proulx.

BNPPL frenzy

Another category of the first digital brands that decided to cross Rubicon into advertising are BNPLs.

The temptation is obvious enough. With their purchase history and credit information, BNPLs are well placed to screen and target users based on whether they are luxury shoppers, have a high income, or, for example, are filling a new home with furniture. They can also credit based on purchases, similar to how Amazon or Instacart closes the loop and claims credit on sales.

BNPL companies are gaining users at a loss, and these profits should recoup over time. And they face a liquidity crisis, because they lend large amounts of money that are recovered in small batches. Affirm and Afterpay, BNPL’s two public companies, lost between $150 million and $250 million in the second quarter of this year alone.

Advertising is a liquidity solution.

Afterpay’s advertising product will start with an affiliate model, co-CEO Nick Molnar told investors in last month’s earnings report. In other words, retailers will be able to take advantage of Afterpay content and user messaging to deliver products.

“There will certainly be the ability to expand the ad serving medium over time to reflect a more traditional platform,” Molnar said.

The dependent model is less invasive; As with Waze’s integrated marketing, Afterpay affiliate links are not IAB’s familiar ad units that might turn off users.

Afterpay’s advertising platform is also a boon to its retail and branding partner businesses. Afterpay customers are people who make purchases, but retailers and merchants must agree to offer BNPL as a payment option in the online shopping platform. Molnar told investors that advertising, especially the ability to re-engage users who have made a purchase, is an important feature to attract and retain retailers.

Ads, ads, everywhere

From Uber to Instacart to BNPL, these new companies and categories are hardly the only examples of ads popping up in new places.

Mobile banking customers may be surprised to discover promotional offers are appearing in their financial apps, powered by Cardlytics. Not to mention Walgreen’s refrigerators and freezers that display ads on screens. Or, God forbid, the Tesla satellite serves ads to empty space.

Tesla has been consistently profitable over the past two years. And the DOOH NEO billboard is a joke, not a cash driver. But as with jokes, it’s funny because it’s partly true.

If Tesla slips below profitability, or faces a financial sustainability crisis. Will you cut staff and curtail operations? Probably.

Most likely, a data-rich company in cash-strapped starts an advertising activity.

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