NEW YORK, NY – Online advertising is crucial for online retailers like Amazon, which generated over $47 billion in ad revenue during 2023 and saw a 19% increase in Q3 2024. Sponsored product listings play a crucial role in ad revenue allowing sellers to pay marketplaces for better visibility of their items in products searches. As platforms increasingly utilize sponsored ads, it is important to understand how these ads perform, impact a user’s experience, and affect sales for non-promoted products. Columbia Business School Professor Kinshuk Jerath conducted a field study with a major online retailer to answer these questions. The research team discovered that properly executed sponsored listings can enhance marketplaces by generating revenue, boosting product sales, and improving customers' experiences by directing their searches for specific products.
The study, The Impact of ‘Retail Media’ on Online Marketplaces: Insights from a Field Experiment, co-authored Professor Vibhanshu Abhishek at the University of California, Irvine and Professor Siddhartha Sharma at Indiana University, shows that sponsored ads affect product sales in nuanced ways. The researchers studied the three most popular product categories for online shoppers: electronics, clothing, and shoes, discovering varied results based on the category. Sponsored listings performed poorly for electronics, but organic, unsponsored products in the same searches enjoyed a significant boost in sales. The opposite occurred for clothing and shoes: sponsored listings significantly outperformed organic listings in both categories. This is because ads are less relevant for easily describable and quantifiable products, like electronics, but more relevant for clothing and shoes which are harder to describe and subject to flash trends.
“Sponsored listings can be a profitable strategy for online marketplaces,” said Professor Kinshuk Jerath, the Arthur F. Burns Professor of Free and Competitive Enterprise and Chair of the Marketing Division. “Our findings suggest these platforms can earn extra ad revenue from these ads without impacting sellers or affecting a shopper’s experience.”
For this study, Professor Jerath and his co-researchers partnered with Flipkart, a large e-commerce marketplace for an eight-day field experiment. They randomly divided around 1.2 million users into three groups, manipulating searches for each group by showing ads at varying positions in the search results and at different volumes ranging from 16 to 26 percent of the total search results. They looked exclusively at electronics, clothing and shoes and compared results for sponsored ads versus organic listings based on user clicks and sales.
Additional Findings Include:
- Shoppers have a high tolerance for the number of sponsored listings in a search result. The researchers tested shoppers’ tolerance for how many sponsored listings appear in a search and found their behavior is unaffected when as much as one in four listings are sponsored, at least in the short term.
- Sponsored listings can help platforms identify new, relevant products to improve organic searches. Since search algorithms for clothing and shoes struggle to include relevant organic listings, platforms can learn from sponsored ads to understand which organic listings might be more relevant to a user.
“Sponsored listings can allow users to find good, new products. Online retailers should continue adapting to the surge in online shopping and find innovative new ways to help both consumers and sellers on their platforms,” added Professor Kinshuk Jerath.
To learn more about the cutting-edge research being conducted, please visit the Columbia Business School.
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