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Although I have a diploma to practice as an investment advisor that's not something I want to do right now - I do want to work in the money management business somewhere in the future but that's another story - Today I make my living as a writer and publisher of articles and videos on a variety of subjects. I monetize this media by running advertisements and for example my participation in the Amazon Services LLC Associates Program run by Amazon Inc. (NASDAQ:AMZN) is important to me.

I'm telling you this because it should be disclosed but also to show you that I have real experience as a publisher running ads from multiple large networks including but not limited to those run by: Amazon, Google (NASDAQ:GOOG), eBay - which I wrote about earlier this year (NASDAQ:EBAY) and private networks that can't be traded.

Detailed knowledge of a business is what can give you an edge as an individual investor. That's why I'm going to break down the relationship between Amazon and its publishers for you.

Amazon is a very complex company but in this article I'll specifically talk about how they build a network of publishers that drives their sales and why this part of their business adds to the moat around its business. Hopefully this will add to your knowledge and your edge when you invest in Amazon.

Traffic to Amazon

Before you can register or buy on Amazon, you will have to find the site. At this time I identify 7 major ways how Amazon pulls traffic into their network of stores.

  1. E-mail marketing to current customers
  2. Social sharing by customers (through e-mail, social media etc.)
  3. Organic traffic coming in from search engines
  4. Traffic through PPC advertisements they run
  5. Traffic coming in through Amazon Services LLC Associates Program
  6. Direct traffic to Amazon.com
  7. Kindle Traffic

Traffic from Publishers

This article revolves around: "Traffic sent by Publishers". Which is basically a form of advertising. Amazon pays publishers or other participants a % of revenue on sales in return of being sent that customer. You will often hear it referred to as affiliate marketing.

Paying a percentage commission on sales is very popular in online advertising because it's very resilient to fraud. Very few ad networks are able to combat fraud when paying by impressions or click. This enables the advertiser to work with a unlimited number of publishers because they - in this case Amazon - doesn't have to keep tabs on all of them on a day to day basis.

Its biggest advantage and disadvantage is that although Amazon does control the terms under which this advertising takes place they don't have control how this advertising is done. At the same time that is also its greatest advantage. It's completely hands off.

The commissions on products sold regularly go up to 8.5%

Why is Amazon attractive to Publishers

Being a giant retailing network gives Amazon an edge. Once you bring a customer to Amazon he or she is much more likely to buy something than when you take a customer to a highly specialized store. Speaking from experience the conversion rate of customers send to Amazon is quite high. Higher than other retailers? I did not run scientific level tests - and have worked with many but not all retailers. But in my limited experience its conversion rate is stellar when compared with other retailers.

Amazon is very effective at making sales. If you visit its site once in a while you might be amazed at how much they remember about your interests and desires.

If you look carefully through a page of their site you might notice that you have shown interest in almost every product you see at one time or another. And if you didn't ... it's possible someone else in your household did. Sorry if I spoiled some Birthday or Christmas surprises. Again this probably increases their conversion rates and that adds to the attractiveness of their associates program. There is nothing as frustrating for a publisher as to send their traffic to a site that is not successful in converting customers.

Finally the trust is there with consumers. Often it's possible to make higher raw commission by sending a customer to a small specialized retailer. A made up example could be a store like "Magicshoppa.com" but because of the trust factor and the reasons already discussed the conversion is not always at the same level. I might get paid more per sale but still make less on the traffic as a whole.

How Does Amazons Moat Expand With Their Affiliate Network

Now you know why Amazon is attractive to publishers. By getting more publishers on board with their program they are also strengthening the moat around their business. Because there are many advertisers on the web that seems weird. It's easy enough to switch right?

No.

First of all the Amazon pay structure "locks" publishers in. Because the pay structure is tiered.

That means they pay based on sellers volume. So as you sell more products per month your income increases exponentially. You make more commissions but also higher commissions. This encourages you - as a publisher - to send most of your traffic to Amazon even if there are other options available.

Second of all once you moved up the tiers there are substantial switching costs.

It's theoretically easy to switch from one advertiser to another. In practice that is much less true. For bloggers or small publishing companies it sometimes means manually going through hundreds or thousands of pages of content and making changes in code. Some changes can be made by using an automated process but this is usually not as effective as doing it the human way. Humans still have the sharpest eye where advertising will be effective or appropriate.

Conclusion

That Amazon has an competitive advantage because of its size is known by most people. That this advantage helps them to attract publishers who take part in its Associates Program might not be immediately obvious.

Furthermore Amazons effectiveness in turning a lead into a customer is not only great for its bottom line but also makes its Associates Program more attractive.

As the company increases its effectiveness as a retailer, it increases its bottom line in a direct way but also in an indirect way.

Let me know if this very specific breakdown helps you to evaluate the attractiveness of Amazon's stock trading at $ 312 today.

Source: How Does Amazon Tie Publishers To Its Network And Grow Its Competitive Moat?