How the “Digital Endcap” Can Help Improve Online Retailers’ Bottom Lines

Holiday retail season is upon us and once again billions of dollars will be spent on advertising to drive sales and profit during the most important time of year. Based on Q3 e-commerce sales estimates, it looks like 2012 will have a strong close. One of the most competitive business sectors on the planet, the delicate balancing act between margin and sales volume during the holiday race can make or break even the best of retailers. As a result, the pressure is on to spend, but spend wisely, to ensure that profits are maximized.

Success in online holiday retail requires the efficient use of digital advertising, which has evolved considerably in the retail sector over the years. Today there are a variety of advertising tactics being deployed, each of which affects different parts of the marketing funnel. At the two extremes of the funnel are traditional display advertising, which is great at building awareness but rarely directly converts viewers into buyers, and paid search advertising, which is highly effective at the bottom of the funnel at helping drive conversion among consumers with a buying intent.

Where the online advertising market for retail has evolved more recently is in the middle of the marketing funnel. One of the most prevalent trends of late is the use of re-targeting, which leverages cookies to target display ads to consumers based on their previous online shopping and/or searching experience. These ads can be thought of as much lower down the marketing funnel than traditional display ads because they are reaching people with previously indicated intent.

This year we are seeing the emergence of another form of display ad that resides further down the funnel, which we are calling the “Digital Endcap,” which refers to a display ad for a manufacturer appearing on a retailer’s website. The example below shows an ad for Kraft Foods appearing on the Walmart.com website.

The term “Digital Endcap” is derived from endcaps, those compelling displays you find at the end of aisles to help promote a particular product, in traditional retail stores. Since the customer has already demonstrated purchase intent by walking into the store, these endcaps can prove to be valuable marketing expenditures by drawing a ready-to-buy customer to your brand.

The value creation opportunity here is apparent. The retailer is able to further monetize the traffic it’s already generating, at virtually zero marginal cost, by providing ad inventory. Even if these ads are monetized at the rate of a traditional display ad, it’s a potentially valuable profit stream for retailers. But there is a strong argument that these ads should be monetized at an even higher rate because they are reaching consumers further down the purchase funnel.

Retailers are getting wise to these advertising opportunities and we can expect to see them venture into this territory with greater enthusiasm. Amazon recently made a big splash during Advertising Week, sending a signal that it intends to become a major player in this market. With 100 million visitors a month and the richest data on consumer purchase behavior of anyone on the web, who can blame them? It will not be surprising to see other major retailers follow suit.

In fact, Amazon and Walmart are not the only ones getting into the Digital Endcap game today. According to Comscore Ad Metrix, more than 8.6 billion display ad impressions appeared on retailer websites in September 2012, an increase of 10% in the past year, with the two market leaders accounting for less than half of the total.

Making money in retail can be challenging, but retailers are a savvy bunch that have virtually perfected the science of how to get consumers to open up their wallets. But however skilled they are at their existing trade, there are always new monetization opportunities, and they are wisely turning to the Digital Endcap as an avenue for growth. Brick-and-mortar endcaps have proven effective in the offline world, and there is no reason that the same approach won’t work in e-commerce as well.