Why NOT to use Amazon Ads for your book

In today’s article, I ask a simple question: does it pay to advertise on amazon for your book? As can be guessed by the exceedingly astute from the title of the post, the answer is no. In addition to explaining how I came to this conclusion, I also will offer a brief review of the basics of Amazon’s online advertising.

I'll examine the matter purely in terms of tangible cost/benefit, and ignore considerations involving ease of use, time wasted dealing with Amazon's bureaucracy, and the myriad other intangible costs involved.

First let’s review some of the aspects of Indie publishing which relate to Amazon’s author ad campaigns, as well as how those campaigns work.

Quick Review of Some Relevant Aspects of Indie Publishing

Printer vs Distributor

In general, to sell something on Amazon you need to be designated a "seller" and sign up for a seller account. This can be nontrivial, and at various times Amazon has made it well-nigh impossible to do so. Authors have a special in, however, but only if they publish a version of their book via Amazon. This means producing a Kindle edition and/or (more recently) printing through KDP (formerly Createspace).

When an author publishes a print edition via some other service, one of two things happen, depending on the type of service. Either that service also offers distribution (Ingram Spark/Lightning Source) or it does not (everybody else). There are two major distributors: Ingram-Spark/Lightning-Source and Baker-Taylor. Of these, only Ingram offers Print-on-demand (POD) services to authors. All other POD services (with the exception of Amazon's own Createspace, now part of KDP) only offer POD.

An ordinary POD company sells books to the author/publisher who then may sell them to bookstores, individuals, etc. The author/publisher is responsible for storage, mailing, returns, invoice management, etc. Ingram, on the other hand, has a catalog that is available to all bookstores and automatically is pushed to them regularly. When you POD through Ingram, your book appears in their catalog — and thus quickly is available for order through almost every bookstore. This doesn't mean it will appear on their shelves, but an individual who wishes to purchase a copy need only walk into a bookstore and ask to order one. In theory, the author/published need never handle a physical copy of the book!

Why does this matter? It affects how you are treated by Amazon.

Author vs Seller

As far as Ingram is concerned, Amazon is just another bookstore. It too automatically slurps in your entry from Ingram’s catalog. Unlike a physical bookstore it offers it for sale just like it does any other book. A “book page” is created for it (and an “author page” may be created for the author), based on a cover image, blurb, etc, obtained from Ingram. Your book will appear and be treated like any other and show as being fulfilled by Amazon itself. Let's refer to this as "Amazon proper". Incidentally, Barnes and Noble will do exactly the same thing online.

Amazon also hosts a seller marketplace (AMS), which includes, among many other vendors, lots of 3rd-party online bookstores. These each slurp in that same info and may offer your book for sale as well, often at a slight discount which they make up for through inflated shipping costs. It's not uncommon for a new author to see their book appear for sale through myriad sellers immediately after launch and assume those are illicit review copies being resold. They're not. These just are from mini-bookstore fronts which regurgitate the Ingram catalog. When someone orders from them, the order is relayed to Ingram which then fulfills it. Ditto for an order through Amazon Proper. It's worth noting that Ingram has special shipping arrangements with Amazon, B&N, etc, and orders from these stores will be prioritized. While it may take 2-4 weeks for an order by the author/publisher themselves to be fulfilled, orders from Amazon or B&N are quickly dispatched.

The information which appears on the Amazon page for a print book is obtained from the Ingram info. They do allow you to declare yourself an author and "claim" books, setup an author page, etc. Almost all authors put out a Kindle version of their book through KDP. In fact, most only do this. Amazon generally attaches this to any existing print page within a week or two. A few emails may be needed to make sure they associate the same author with both, etc, but generally it's pretty smooth (as far as Amazon processes go).

Independent of whether you are an author or publisher, you may setup a store-front on Amazon. Some publishers do this. In this case, you must register as a seller, setup tax info, etc. In theory, you could sell anything, not just your book. The seller can control the descriptions of products they sell, etc. But authors generally need not go to such lengths — as long as they are using KDP for at least one of their version.

Why all this rigamarole? There is one area where it makes a big difference. Only sellers can run Amazon ad campaigns. If you only have a print edition which has been slurped in, you cannot run an ad campaign. You would have to create a seller store-front, sell the book through that, and then run a campaign as that seller and only for the things sold on that store-front. You couldn't draw generic traffic to your book on Amazon proper.

There is a trick, however. As mentioned, authors are viewed as an automatic type of seller --- but only if they have a version of their book published through Amazon. If you've published a Kindle version of the book, then you qualify. In principle, the ads only would be for that version. But since Amazon links all versions of the book on a single page, de facto it is for all of them. No seller account is needed. This is how most author ad campaigns are run.

On a practical note, Amazon used to distinguish author ad campaigns from others, offering tools which were more useful. Recently, they lumped them in with all other sellers, making practical management of ad campaigns much more challenging. Most sellers of any size use the API or 3rd party firms to manage their ad campaigns, but as a single author you will be forced to use Amazon's own Really Awful Web Interface. Hmm… they should trademark that. Because it describes SO many of their web interfaces. But, that's not what this article is about. Let's assume it was the easiest to use interface in the world, a pleasure on par with the greatest of epicurean delights. Is it worth doing?

Before answering that (well, we already answered it in the title, but before explaining that answer), let’s summarize the levels of complexity in managing sales/ads through Amazon:

1. Easiest. Fulfillment via Amazon and can run ad campaign via Amazon as is:

  • Kindle edition, no POD

  • Kindle edition, POD via Amazon KDP

  • No Kindle edition, POD via Amazon KDP

  • Kindle edition, POD via Ingram

2. Some effort. Fulfillment via Amazon but need a seller account to run an ad campaign

  • Kindle edition, POD via somebody other than Amazon or Ingram

  • No Kindle edition, POD via Ingram

3. Messiest. Seller account needed to sell at all

  • No Kindle edition, POD via someone other than Amazon or Ingram

Types of Ad Campaigns

Next, let's review the types of Amazon ad campaigns. There currently are three types. A given author may run many separate ad campaigns for the same book — but each will be of one and only one type.

1. Sponsored Product Targeting: These ads are in the row of “sponsored products” which appears when you view the relevant product's Amazon page. In principle you give Amazon a list of specific books, similar in theme or style or subject matter or whose readers are likely to be interested in your own. In practice, you have to be even more specific. You give Amazon a list of "products", defined by ASINs. There may be many editions or versions of the same book. You've got to include 'em all. By hand. Without any helpful "select all" tool. And remember them. Because all you'll see once your ad campaign is running is a breakdown by ASIN.

2. Keyword Targeting: These ads appear in searches. There are 3 locations they may be placed: the top 2 spots, the middle 2 spots, or the last 2. Each page of results has ads in one or more of these locations, and they're designated "sponsored". Try a few searches, and you'll see the placement. You give Amazon a list of keywords, generally two or more word phrases, and select how specific a match is required for each (exact, containing it, or broadly related). Then your ad will appear in the results when someone searches for those phrases on amazon. Keyword targeting allows negative keywords as well. For example, it may be a good idea to negate words such as "dvd", "video", "audio", etc, especially if the most popular entries are in those categories. Search for your keyword, see what comes up, and negate any undesirable groups that appear toward the top (using -foo in your search). When you’ve negated the relevant keywords, the top entries should be precisely what you'd like to target.

3. Category Targeting: You pick the Amazon categories that best suit your book --- and presumably the book appears when somebody clicks the category. My experience is that category targeting is well-nigh useless for authors, and generates very few imprints or clicks. So we'll ignore it.

Ok, one more piece of review and then we’ll get to the analysis.

How Amazon Ads Work

Although their locations and types differ may differ, all ads are placed via the same process: an auction. In fact, pretty much any ad you see anywhere online has been chosen via an almost identical process.

Every time a web page is served to a user (ex. you browse to a particular product), there are designated slots for ads. This is true of almost any webpage you view anywhere --- all that differs is who is selling the ad space. Those slots are termed "impressions" (or more precisely, the placement of an ad in one is called an "impression"). Think of them as very short-lived billboards. To determine which ad is shown, an auction is conducted for each. This all is done very quickly behind the scenes. Well, not *so* quickly. Guess why webpages are so slow to load...

Auction

Because of its ubiquity, the auction process is fairly standard by this point. What I describe here holds for most major sites which sell advertising. The auction used by almost everybody is called a "second price auction". In such an auction, the highest bid wins but only pays the 2nd highest bid. Mathematically, this can be shown to lead to certain desirable behaviors. Specifically, it is optimal for each participant to simply bid their maximum instead of trying to game things. This is important because Amazon will be given a maximum bid by you, and can only act as your proxy if it has a well-defined strategy for using it. Since it’s also acting as everyone else’s proxy, such a strategy must be a truthful one.

[As an aside, what I described technically is called a Vickrey auction. Online services use a generalized version of this in which multiple slots are auctioned at once in order of quality. I.e., all the impressions on a page are auctioned simultaneously to the same bidders. The highest bidder gets the best impression, but pays the 2nd highest bid. The 2nd highest bidder gets the 2nd best impression but pays the 3rd highest bid, etc.]

If you bid $1 and the 2nd highest bid is $0.10, you win and only pay $0.10. So, if you're a lone risk-taker in a sea of timidity, it pays to bid high. You'll always win, but you won't pay much. However if there's even one other participant with a similar strategy, you may end up paying quite a bit. If both of you bid high, one of you will win, and will pay a lot. For example, if you bid $1 and the other guy bids $0.99, you'll pay $0.99.

So far, we've discussed the second price auction in the abstract. It's straightforward enough, even if the optimal strategy may require a little thought. The more interesting issue is what precisely you're bidding on.

In an ad auction, you are *not* bidding on the impression per se. Rather, you effectively are bidding on an option on the impression. Let me explain.

Once every impression on the given web page has been auctioned, the winning ads are displayed. However, the winner of an impression only pays if the user clicks on their ad, regardless of what happens afterwards. To summarize:

  • Win impression, no click: Cost= 0

  • Win impression, click, sale: Cost= 2nd highest bid

  • Win impression, click, no sale: Cost= 2nd highest bid

Amazon gets paid only if your ad is clicked on. If you win a million impression auctions and nobody clicks on your ad, you pay nothing. If every impression you win gets clicked on but nobody buys anything, you pay for all those impressions. In terms of what you pay Amazon, sales mean nothing, impressions mean nothing, only clicks count. But impressions are what you bid on. Financially, this tracks more closely the behavior of an option than a commodity.

Terminology

Obviously, the bid placement process is automated, so you're not in direct control of the bidding in each auction. In essence, Amazon acts as your proxy in this regard. We'll get to how your bids are placed shortly, but first let's review some terminology.

  • Impression: We already encountered this. It is placement of an ad in a particular slot on a particular web page that is served. It is important to note that this refers to placement one time for one user. If the user refreshes the same page or another user visits it, a fresh auction is conducted.

  • Click-through-rate (CTR): The average fraction of impressions that get clicked on. The context determines precisely which CTR we're talking about.

  • Conversion Rate: A "conversion" is an instance of the end goal being accomplished. In this case, that end goal is a sale (or order). The "Conversion Rate" is the average fraction of clicks that result in sales.

  • Conversions per Impression (CPI): The average fraction of impressions that result in sales. This is just the CTR * Conversion-Rate.

  • Order vs Sale: For most purposes these are the same. For products which may be bought in bulk, the two may differ (ex. 100 boxes of soap could be 1 order but 100 sales). But this rarely applies to books since customers generally buy only one.

  • Cost Per Click (CPC): The average cost of each click. Basically, the average 2nd highest bid in all auctions won by you and for which a click resulted.

  • Average Cost of Sales (ACOS): Each click may cost a different amount, so this measures the average actual cost of each sale, usually stated as a % of sale price. A 200% ACOS for a $10 book means that it costs $20 of advertising on average to make one sale. The ACOS is the CPC/Conversion-Rate.

Bid Placement

I mentioned that an auction is conducted for each impression, and that it is done very quickly (in theory). If that's the case, who are the bidders and how are the bids placed?

The pool of potential bidders includes every active ad campaign which hasn't run out of money that day. This pool is narrowed by the specified ad campaign criteria (product targets, keywords, negative keywords, category, etc). The result is a pool of bidders for the specific auction. In our case, these generally would be authors or publishers --- but in principle could be anyone.

Amazon acts as the proxy for all the participants. It determines which ad campaigns should participate in a given auction and it bids based on their instructions. Other than this, it has no discretion.

As a bidder, you have control of the following (for a given ad campaign):

  • Campaign type: product, keyword, or category.

  • A list of products, keywords, negative keywords, and/or categories as appropriate for the campaign type.

  • For each keyword, product, or category, a maximum bid.

  • A "daily" budget. I'll explain why this is in quotes shortly.

  • Ad text. You can't control the image (it's your book cover), but some text can be provided.

Putting aside the campaign type and ad text itself, the salient point is that there is a list of "items" (keywords, products, or categories) which each have a maximum bid specified. There also is an overall daily budget.

It turns out that the "daily" budget isn't really “daily.” Amazon operates on a monthly cycle, and assigns a monthly budget based on the number of days and the daily budget. On any given day, the daily budget can be exceeeded, though generally not by some huge amount. If Amazon does exceed your monthly budget (which can happen) it will refund the difference. I've had this happen. The point is that you're not really setting a daily budget but a rough guideline. It’s the associated monthly budget which is used.

Once you exceed the budget constraint, that campaign is inactive until the next day (or month, depending on which budget has been exceeded). Obviously, that makes bidding relatively simple — there is none. So let’s assume the budget hasn’t been breached.

For each auction, Amazon must determine whether any of the items in the campaign are a match. It then applies the specified maximum bid for that item. In principle. But nothing’s ever that simple, is it?

Bid Adjustment

By this point you may have noticed a major problem with the auction system as described. Let's look at is from a transactional standpoint.

You earn revenue through sales, but pay for clicks. The resource you have is money (your budget for advertising) and you need to trade it for sales revenue.

Amazon earns revenue through clicks, but pays in impressions. What do I mean by this? The resource Amazon has is impressions, and they need to trade it for click revenue.

Any scenario that results in lots of clicks per sale (or more precisely, a high ACOS) is detrimental to you. You wish to minimize ACOS. Otherwise, it will cost a lot of ad-money per sale, and that money presumably would have been better spent on other approaches.

Similarly, any scenario which results in lots of impressions per click is detrimental to Amazon. If those impressions had been won by more effective sellers, then people would have clicked on them and Amazon would have been paid.

As an extreme example, suppose Bob's Offensive Overpriced Craporrium wins every auction on Amazon. Then Amazon will make no money from its ad business. On the other hand, if Sue's Supertrendy Awesomorrium won, then through hypnosis, telepathy, and blackmail every single user would be compelled to click. This is great for Amazon.

The problem is that you have control over your ad and, in broad strokes, the types of impressions you bid on. But what control does Amazon have? Other than heavy-handed tactics like throwing Bob off the platform, it would seem to have little means of preventing such losses. Obviously, this isn't the case. Otherwise, how could Jeff Bezos afford a $35 Billion divorce? Amazon actually has 2 powerful tools. It is important to know about these, since you'll probably perform like Bob when you first start advertising.

First, Amazon has an algorithm which selects which impressions are a good match for you. Sometimes they can tune this based on performance. Amazon has no control when it comes to product-targeting. If you said: sign me up for auctions involving ASIN X, Amazon dutifully will do so. However, for other approaches such as keyword or category targeting, they have discretion and can play games. Bob quickly may find that he somehow isn't a good fit for anything but books on bankruptcy.

Second, Amazon can reduce your effective bid. In theory, they will bid your stated maximum for the item in question. However, they may throttle this based on performance. Even if your maximum is $3, you may end up bidding $2. It's unclear whether this affects the amount you (or the other winner) pays upon winning (if a click results), but it probably does. Conducting an auction under other auspices would be very difficult. So, you may end up losing even if the 2nd highest bidder isn't as high as your maximum.

Ok, now that we have the background material out of the way, let’s get down to brass tacks. Or iron tacks. Brass is expensive.

Why it doesn't pay to advertise

Now that we've reviewed the practice of advertising, let's look at whether any of this is worth it. Specifically, what would it take to be profitable?

Let us suppose that our book sells for $G, of which we keep $P. For example, a $10 book may yield $2.50 in net revenue for an author (where "net" means net of print costs, Amazon's cut, etc, not net of advertising costs). In practice, things are a bit more complicated because there may be different P and G's for the print and Kindle editions. For simplicity, let's assume a single one for now.

Before getting to the formal calculation, let's look at a real example. Here are some numbers from an ad campaign I ran for my first book, "The Man Who Stands in Line." I didn't take it too seriously, because the book is not in a genre most people read. But I viewed the process as a good trial run before my novel (now out) "PACE"

Here are the stats. The campaign ran for a little over a year.

  • Impressions: 1,716,984

  • Total sales: $423.99

  • Total ad costs: $931.56

  • CPC: $0.48

  • CTR: 0.11%

  • Total Sales: 77

  • ACOS: 219.7%

While my book didn't break any records, it did furnish some useful data. Let's look at these numbers more closely.

On its surface, the ACOS doesn't look too terrible. After all, I paid a little over twice the amount I made — right? Not quite. I paid a little over twice my gross revenue. The problem is that I only care about net revenue.

As an extreme example, suppose I have two books A and B. Both yield me $2 net revenue per sale as the author, but A costs $1000 and B costs $4. Now suppose I have a pretty darned good ACOS of 50% on $1000 worth of sales. In both scenarios I've paid $500 in advertising costs. But in scenario A, I've made $2 net revenue. I.e., I have a net loss of $498. In scenario B, I've made $500 net revenue and have broken even.

We immediately see 2 things:

  • The same ACOS can correspond to vastly different net revenues depending on the retail price of the book.

  • It's really hard to advertise at a profit.

Returning to my own book, the first problem in analyzing the numbers if that we can't easily determine net revenue. There were two book formats. The book was available for $9.99 as a paperback (resulting in net revenue of around $2.50) and a $2.99 Kindle edition (net revenue about $2). Fortunately, the two net revenues per book are close. From the total sales, we can guess a net revenue between $150-200. That paints a much more dismal picture than the ACOS implies.

Let's next consider a more typical books, and figure out the numbers needed to make advertising profitable. Because the ratio of net to gross revenue per sale will be highest for the Kindle edition, let's solely focus on that. Any print editions will have even worse ad costs.

A CPC of $0.50 for books is fairly typical from what I've seen. Suppose you have a Kindle book priced at $4.99. With the 70% royalty rate (and no large file fees to speak of), you'd make a little under $3.50 per sale. But let's be liberal. Let's say your net profit is $4 per book.

As mentioned, ACOS is deceptive. If you have an ACOS of 1, it looks like you're breaking even. You're not. It means your gross sales are breaking even. Your net revenue is negative. But it's much much worse than that if you have a print book. Your net profit may be the same across formats but the gross revenue isn't. The higher the price of the book and the lower the ratio of net to gross revenue per sale, the more unrepresentative the ACOS becomes.

With the numbers we proposed, we must average 8 or fewer clicks per sale to remain in the black. Otherwise our net revenue for the sale is less than the advertising cost. That is a very optimistic number. Even the most precisely targeted advertising rarely sees such a rate. And that's just to break even.

Returning to my own book, what sort of ACOS would be required to break even? With the print edition, we would need a 25% ACOS. With the Kindle edition it would be closed to 66%. In my own case I would have required around a 5x lower ACOS than achieved. But that's just to break even! Presumably we want to do better. The point of advertising isn't just to break even. In essence, I would need an unattainable ACOS and Conversion rate for advertising to pay off.

From these numbers, it's clear that advertising on Amazon simply can’t pay off for Indie authors. From an economic standpoint it always will operate at a loss.

But are there any other reasons to advertise?

I’ve heard claims that the real purpose of such ads is exposure, that one nominal sale translates into many through word of mouth, etc, I've seen no evidence of this. It may happen, but the scale is very small.

Another argument I’ve encountered is that impressions matter. Having lots of impressions may not translate into immediate sales but it raises awareness. The more times people see a book, the more "validated" it becomes in their mind. Presumably this translates into later sales which can’t be tracked as direct clicks. This is good for the author, since it means sales without any associated click-cost. Unfortunately, I've seen no evidence of this either. My real sales closely tracked the 77 listed; there weren't all sorts of separate ones which didn't appear as clicks or conversions. True, this wasn’t the world's most marketable book. But if 1.7MM imprints make no difference then it's too expensive to reach whatever number would.

My sense is that one or both claims may be true for large, well-known publishers running huge campaigns, and where a friend's recommendation of a recognizable title tips the scale. But that requires a critical mass and multi-faceted marketing strategy, and way more money than a typical indie author will care to invest.

Like most services associated with indie publishing — agent readings at conferences, query review, marketing and publicity, books on marketing and publicity, etc — Amazon ads is just another piece of a machine designed to separate the naive from their money using the oldest of human failings: hope.

So how should you sell books? If I knew, I’d spend my days basking in luxury and fending off rabid fans rather than writing snarky posts which nobody will read. But until that happens, I'll keep you posted on the things I try. The simple answer may be the one you don't want to hear: you don't. You write if you have the inclination and means to do so, but you should have no expectation of being able to sell your book. If you wish to get people to read it, you may do so at a loss via Amazon ads. But there probably are much more effective ways to pay for readers.

K.M. Halpern