Amazon's (NASDAQ: AMZN) advertising business is growing extremely quickly. There's so much demand for Amazon ads, in fact, that some analysts have questioned whether Amazon has enough inventory to sell to merchants that want to get in front of its customers.
That may be why Amazon is testing the idea of including free samples in customers' packages, according to a report by Axios. Free samples are a tried and true advertising strategy, and combined with Amazon's shopper data and AI capabilities, it could prove a very efficient use of advertising dollars for some brands.
The strategy would serve to further separate Amazon's ad products from larger digital competitors like Facebook (NASDAQ: FB) and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOG) Google.
Image source: Amazon.
Billions of advertising opportunities
Amazon sends billions of packages to people's homes every year. The company announced it shipped over 5 billion items to Prime members in 2017, and that number likely climbed even higher in 2018. It also doesn't include the billions of items sold to non-Prime members.
Amazon has experimented with including advertisements on its packaging before. It promoted Minions with its boxes in 2015, and it promoted the ability to watch Thursday Night Football on Prime Video in 2017.
Image source: Amazon.
But free samples in packages can be much more personal. All of that shopper data -- searches, purchases, items viewed but left in a shopping cart, etc. -- can be used to send individual customers samples of items Amazon is confident they'll enjoy.
Brands are constantly looking for customers to provide free samples to. They advertise on Google or Facebook to find them and get them to opt in for a sample in exchange for a mailing address. Amazon can offer a complete hands-off solution for brands, making it easy to find new customers.
A typical Amazon move
Amazon has historically leveraged its existing operations and infrastructure to introduce new products and services. That strategy enables it to keep prices low, increase the value of Amazon Prime, and keep customers happy. It's also enabled it to become a profitable business even though its core retail operations still operate on the thinnest margins.
Sending free samples in packages Amazon is already delivering comes with very low marginal expenses. Amazon just has to stock the free samples in its warehouses and include them in packages where there's practically no increase in shipping expense. Free samples are usually very small and light, so finding space for them in packages and warehouses shouldn't be too difficult or costly.
Practically any revenue from sending free samples to customers will flow straight to Amazon's bottom line. What's more, Amazon is presumably sending these samples to loyal Amazon customers, so it's likely to win more sales from customers if and when they decide to purchase the item sampled. Amazon gets the same benefit from many of its other advertising products.
Taking on Facebook and Google
Amazon is one of the few challengers to Facebook and Google that's actually managing to take share of the digital advertising market. Very few platforms can compete with the reach and depth of targeting data available through the so-called duopoly. Amazon is one of them. That's why it's expected to grow its market share from 4.1% last year to 7% next year, according to eMarketer, largely at the expense of Facebook and Google.
Amazon is already able to differentiate itself by offering the No. 1 place for high-value product searches. Product searches show advertisers intent to purchase, which means advertisements have a better chance of converting into a sale. But Google and, to a lesser extent, Facebook have similar intent signals that they can sell ads against.
Amazon is the only one that offers advertisers a chance to get their product into a potential customer's home. That could shift some ad spending from Google and Facebook to Amazon for brands trying to get customers to sign up for free samples. What's more, it could be an introduction to Amazon's other ad products. Amazon has worked to simplify its ad platform, combining all of its products into a single account for advertisers.
Amazon's unique advertising capabilities could lead to a greater share of the digital ad market as well.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares), Amazon, and Facebook. The Motley Fool owns shares of and recommends Alphabet (C shares), Amazon, and Facebook. The Motley Fool has a disclosure policy.