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Retail Media Network Essentials

As many retailers round the corner into the new fiscal year, we have identified three key topics that executives should keep an eye on for 2023: omnichannel fulfillment, retail media networks (RMNs) and pricing.

Today, we cover media networks, which have become prominent initiatives for retailers over the last several years. Retailers, such as Nordstrom, BJ’s Wholesale  and Lord & Taylor, launched media networks in 2022, and Amazon continued its record-breaking growth as the leader in the space.

Media networks are offered by retailers to brands for advertising and product promotion within the retailer’s digital properties, such as the website and mobile app. This enables brands to reach customers when they are shopping.

The growing competition in the space – coupled with the struggles of the Google and Facebook advertising duopolies – means that 2023 has the potential to become a watershed year for many RMNs.

So, how can retailers position their media networks for growth in 2023 and beyond?

We lay out a few key areas for retailers to evaluate this year.

#1 The big picture: RMNs have a sustainable performance advantage due to the direct link to commerce but require investments on the tech side to prosper over the long run

Retail media networks are poised for growth over the next three to five years because of their ability to directly link ads and sales for advertisers. The market is widely estimated to be growing at 25% per year.

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Source: The Boston Consulting Group

The retail media network value proposition is centered on the performance measured from a customer’s ad exposure to sales through the retailer’s point of sale. This contrasts with traditional media like TV – or even Facebook – that now rely on more implicit sales measures given the reduction in access to third-party data.

Leading with a commerce-first model – rather than an ad tech-first platform – separates retail media networks from other advertising options.

Meta has long tried to build commerce engines on top of its core platforms with little success. In fact, it seems the company has all but shuttered its commerce ambitions, focusing instead on building the Metaverse, where it hopes to own the entire ecosystem, from customer engagement to commerce to advertising platform.

Commerce-first gives retailers a major advantage when performance is paramount for brands and ad tech platforms are losing access to first-party data.

On the flip side, RMNs have a way to go, when it comes to building out technology capabilities on par with today’s ad tech platforms to capture a greater piece of the pie going forward.

With increasing entrants and an estimated 600 RMN networks for advertisers to choose from, investments in retailers’ ad platforms are essential going forward.

This is the reason Amazon is a leader in the advertising space and continues to grow faster than others, including Google and Meta. It has direct commerce access – like other retailers – but offers an advanced ad tech platform that can compete with the top players in the space. Retailers will need to evaluate their own features and offerings in 2023 to make product enhancements while finding ways to reduce friction for brands that spend advertising dollars with them.

The challenge for retailers is that the relationship between vendor and retailer is flipped in the RMN world, with vendors now clients of the retailers’ media networks.

Re-orienting around this inverted dynamic, which contrasts with the well-established buyer-vendor relationship, is critical for retailers to capture more than their share of trade funds that are often simply re-allocated to RMNs.

Retailers will have to assume the same customer-first lens they use in the retail business to understand the brand experience on their media networks.

Commerce-first is an advantage for now, but with so many options for advertisers and brands to choose from, the winners in the retail media network, over the long run, will offer scale and convenience (self-serve) for advertisers in the market.

#2 Identify your performance gaps: look at your costs and ROAS to grow beyond your share of trade funds

Given the commerce-first lens, the long-term success of a retailer’s media network boils down to ad performance.

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Source: McKinsey & Co.

This means having: a) relevant ads for customers that drive sales and b) reasonable cost of impressions (cost per mille or CPM).

Most retail media networks measure performance (typically, return on ad spend or ROAS) differently from one other, which makes it difficult for brands and agencies to make informed decisions around media campaigns and general strategy.

Directionally, though, brands have a sense for relative performance in the market and will allocate their budgets accordingly.

Often brands simply re-allocate trade funds from one part of the business to a retailer’s media network, meaning the media spend is not incremental. As one brand told us, “The elephant in the room with RMNs is the margin factor; as long as there’s margin associated with media, it’s considered trade.”

To drive incremental media spend means driving outsized performance or unlocking new audiences for brands such that they want to spend more than their fair share with you. This is how Amazon has been successful, with many brands now spending almost 10-20% of their revenue on ads.

To identify opportunities for incrementality and growth in your media network, consider:

  • Identifying the total trade fund allocation at the enterprise level (promotional dollars, shopper marketing and RMN media funds) to understand if you are growing your fair share with sales. Brands allocate their funds at an account level through the revenue management process – it helps to look at your allocation in the same way.
  • Size up your RMN’s ad performance across onsite and offsite media by talking to vendors and evaluating your cost in the market in relation to peers and ad tech players.

Taking an enterprise-level view to understand how brands are allocating trade funds and then performance within your media networks helps take a customer-first point of view to unlock new opportunities.

#3 Unlock new opportunities for brands across onsite and offsite media

As RMNs expand – and evaluate their positioning in the market – new opportunities will come into focus to expand onsite media (retailer-owned properties), as well as offsite (non-retailer properties, such as streaming TV or social media).

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QR codes are an increasingly popular way to activate TV ads, but the jury is out on their effectiveness.
Image: Washington Post

RMNs can evaluate their sell-through rate for onsite media in relation to their pricing and ROAS (area #2, above) to identify opportunities for expanded supply to meet demand as the market grows.

Beyond performance, brands want access to new and unique customer audiences – often referred to as programmatic offerings – that RMNs provide and advertisers cannot obtain anywhere else.

Finding ways to expand onsite media, as well as unlock new programmatic audiences for advertisers, will help retailers drive growth in the coming years, along with continued tech investments and an evaluation of the media networks’ ad performance.

What areas are you focused on to drive media network growth?

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