Unlocking the Power of Retail Media Networks: How Data-Driven Advertising is Changing the Retail Promotions Landscape

With razor thin margins and increasing competition for the customer, retailers are always looking for new ways to monetize and stay ahead of the curve. Marketing budgets traditionally spent on trade promotions has shifted in part to digital advertising such as Facebook and Google as CPG companies seek greater flexibility and targeting of consumers.

This shift in promotional spend comes at the expense of retailers. Facebook and Google account for nearly 50% of all digital ad spend in the US. But Amazon started challenging this in 2012 with the creation of their own Retail Media Network (RMN) which brought promotional dollars back into the Retail ecosystem, and we are seeing a massive surge of interest in retail media with new technologies and increased data access and measurement at the center. McKinsey forecasts robust growth in this space, predicting retail media ad spend to grow from approximately $45 billion to over $100 billion by 2026.

Building on a Foundation of Trade Promotions

For decades, Consumer Goods companies (CPGs) solely relied on trade spend (often simplified to trade promotions) to drive consumption in retail. Trade funds were spent on promotional activities, discounts, and other forms of marketing support to promote their products within a retail environment. This included various trade-related expenses incurred by manufacturers or brands to encourage retailers to carry and promote their products, such as trade promotions, trade allowances, slotting fees, and other trade-related costs. Trade spending was a significant portion of the marketing budget for many CPGs - typically the largest promotional expense.

Leveraging trade promotions comes with its challenges, especially around flexibility. Trade promotion can be complex to plan, execute, and measure and are inflexible as a result. Managing trade spend requires careful coordination with retailers sometimes up to 5 months in advance. In addition to negotiating price discounts and the program, reviews are made for inclusion in promotional materials and signage, and shipping and installation of promotional displays in stores. This can be time-consuming and resource-intensive, requiring significant effort and investment in trade promotion management systems and processes.

This inflexibility has led Consumer Goods companies to divert funds from trade promotions and invest more in digital advertising, which offers greater flexibility and measurement. Digital advertisements don't require advanced negotiation, and can be adjusted up to and throughout the duration of the promotion.

COVID accelerated this shift. Consumers that were shopping more online became less responsive to traditional in-store trade promotions, which lowered the ROI for Consumer Goods companies.

Consumer Goods companies are now allocating a portion of their trade spend towards digital advertising to drive product visibility, increase online sales, and enhance their brand presence. Digital advertising has been a great advancement for these brands, but it still has limitations and comes at the expense of retailers.

The Rise of the Retail Media Network

Retail Media Networks entered this space to complete the picture. A retail media network (RMN) is a digital advertising ecosystem that is owned and operated by a retailer. RMNs enable retailers to monetize their own mobile applications and e-commerce sites with complete control by displaying targeted ads to shoppers. Retail media networks typically offer various types of advertising formats, like display ads, sponsored product listings, native ads, and other types of online advertising. These ads are displayed on the retailer's digital properties, such as their website, mobile app, search results, and other relevant online channels. And the most common advertiser on RMNs? Consumer Goods companies, which are among the largest overall advertising spenders in general.

RMNs have a considerable advantage in this area over traditional advertising networks. By leveraging their own customer data and online platforms, retailers are able to offer highly targeted and personalized advertising opportunities to brands and advertisers. While traditional digital advertising networks can target shoppers based on general interest and enriched data, where they struggle is targeting based on purchase history and offering a closed loop that shows from click to purchase, RMNs can also target individuals based on customer profiles, including demographics, browsing behavior including previously viewed ads and engagement, and actual purchase history. RMNs enable Consumer Goods companies to be more precise in targeting individuals with an actual likelihood of buying.

The advantage for advertisers doesn’t end with targeting. Traditional digital advertising measurement ends when the user clicks on a page that takes them to a product (or a few steps beyond), but it doesn’t capture whether the person viewing the ad actually purchased the item. RMNs enable Consumer Goods companies to see which shoppers viewed the ad, who engaged, who added to the basket, who abandoned the basket, and who ultimately purchased the item. Consumer Goods firms are ultimately interested in knowing that their investments have led to increased sales. This level of detail enables advertisers to get accurate ROI on their promotions.

Retail media networks have gained prominence in recent years as retailers look for new revenue streams and ways to monetize their online presence. Many retailers exist on wafer thin margins and are dependent on trade funds to achieve profitability. Unlike traditional advertising networks, RMNs allow retailers to capture 100% of advertising revenue at 60%+ margins. And given the level of precision in RMNs due to purchase history that enables advertisers to focus their engagement on shoppers that are most likely to purchase, advertisers will pay premium ad rates which further helps retailers.

Retail media networks provide a win-win situation for both retailers and consumer goods companies, as they allow retailers to generate additional revenue and provide brands with a highly effective and relevant advertising channel to reach their target customers. Ultimately, advertisers will continue to use a hybrid mix of digital advertising, traditional trade spend and increasingly retail media networks.

How Retail Media Networks Operate

Retail media networks can be operated by large retailers with a significant online presence, such as e-commerce platforms, online marketplaces, and retailers with popular websites or mobile apps. A retail media network is a digital advertising ecosystem owned and operated by a retailer, which allows them to monetize their online properties by displaying targeted ads to their customers based on their first-party data.

At their core, RMNs work by allowing Consumer Goods companies to bid on advertising space within a retailer’s digital properties, like their website or mobile app or even in-store digital displays. Consumer Goods firms can use the platform to target customers based on a range of factors, like past purchase behavior, purchase frequency, brand and product affinities, demographic information and browsing history. The richer the information on shoppers and their behavior, the better the results for advertisers.

Imagine, for example, a grocery store chain that operates an online platform where shoppers can purchase groceries for home delivery or pickup. Through that grocery store’s RMN, a CPG brand can display targeted advertising to customers based on their browsing behavior and purchase history. For example, if a customer recently purchased baby formula, they may see targeted ads for diapers or other baby products from CPG brands. Or they may be excluded from advertising if the customer has a high brand affinity for a specific brand. In trade spending and traditional advertising, brands spend large sums to display ads with the hope that a small portion of those viewing the ads will have a need for the product. With RMNs, the advertiser is confident that their spend is being efficiently spent.

Once the ad space is purchased, the RMN tracks the serving of ads to target consumers, including who was served the ad and who engaged in the ad. Clickstream and purchase data is used to track who added the product to baskets, and who followed through with purchase.

This level of data capture provides advertisers with rich information on ad effectiveness especially in contrast to other promotional channels.

RMNs have become increasingly popular in recent years, as retailers have recognized the potential value of monetizing their customer data and providing advertisers with a highly targeted advertising solution. Some of the largest retailers in the world, including Amazon, Walmart and Target have established their own RMNs, which have quickly become major players in the digital advertising landscape.

RMNs are not used exclusively. Most Consumer Goods companies are leveraging traditional trade spend to manage price promotions, in store activities and ensure item availability on shelf, but they’re also using digital advertising to drive top of funnel awareness and increasingly Retail Media Networks to augment these other activities. If a trade promotion isn’t meeting expected numbers, a retail media network enables an advertiser to make real-time adjustments to expand awareness.

Data is the Secret to Successful Retail Media Networks

Retail Media Networks succeed when brands are able to precisely identify the shoppers that are most likely to purchase their products.

Effective data management is critical for RMNs because it allows Consumer Goods companies to target their ads more effectively and reach the right audience at the right time. RMNs rely on the vast amount of data that retailers collect on their customers, like their purchase history, browsing behavior and demographic information to create highly targeted advertising campaigns. This enables RMNs to provide advertisers with deep insights into customer behavior and preferences, which can be used to create more personalized, relevant ads.

For example if an advertiser wants to target customers who are interested in a specific product category, like pet supplies, the RMN can use data on a customers’ previous purchase behavior and browsing history to identify who would be most interested in a specific product. This can in turn lead to higher engagement rates and higher likelihood of purchasing, which benefits the retailer and the brand.

How to Prepare for a Retail Media Network

Many retailers are piloting or considering the adoption of Retail Media Networks. With the level of energy and investment in RMNs, it is likely that some networks will fail. The winners will be decided by those with the largest audience and best ability to target consumers. This means building a rich set of behavioral shopper data.

In advance of building a retail media network, companies would be best served by establishing their data foundation on the Lakehouse.

1. Developing a data strategy: Data is critical to the success of RMNs. Defining a strategy for the collection and integration of data from internal systems, partners and clean rooms that contributes to rich customer analytics at the onset is important. Openness in data sharing will become a key advantage as it decreases the cost to participate, allowing more budget to be spent on ads. Companies should factor in the inclusion of unstructured data and real-time data and how this information will be used to extract relevant features. The Lakehouse simplifies this by allowing companies to integrate and manage all types of data.
2. Implement a composable CDP: A composable CDP architecture offers the greatest flexibility in capturing different data types in batch and real-time, integrating that data and centrally managing it for downstream use in systems such as Retail Media Networks.
3. Move to real-time: The greatest predictor of future behavior online is what the shopper was just looking at. Moving to real-time data enables retailers to take advantage of data in the moment before the shopper needs change. With native streaming support and serverless features in the Lakehouse, companies can now enable end-to-end real time decision making.
4. Establish a consumer feature store: “Features” are the reusable data points that can be used to improve data science models or be used in audience selection. These are generated by analyzing data sets. In a dataset of customer information, features could include age, gender, income level, brand affinities, dwell time on product pages, purchasing history and more.

Building a Retail Media Network requires a significant investment in time, resources and expertise but can have massive benefits. The Databricks Lakehouse Platform can make it easier by enabling retailers to streamline and centralize the collection and management of all shopper data. Learn more